It’s common for traders to start the year by re-visiting their plan and assessing current conditions. In addition to using chart time intervals that are best suited to a preferred timeframe, traders want to select from distinct technical tools. It can be extremely helpful to re-set your view by starting with clear, basic trends using intervals that are one level up and down from your preferred view.
These basic bar charts for the Dow Jones Industrial AverageSM (INDU) provide objective trend information via Simple Moving Averages [SMAs] and slightly more subjective trend information via a linear regression channel. The latter becomes subjective when selecting channel construction dates.
- Linear Regression Channel constructed from 7/10/09 – 7/9/10 and extended
- 10-month SMA on price and volume
- 20-week SMA on price and volume
- 20-day SMA on price and volume
- 50-day SMA
Both the SMAs and regression channel lines serve as potential areas of support/resistance for price.
Although the dates used to construct the regression channels are the same, the slope of the trend varies since additional data points are used as you move down in the time scale. While a weekly chart uses only Friday’s close for that weekly data point in the regression calculation, the daily chart uses all five closes from the week.
Log scales which can be preferred over longer timeframes negatively impact regression channels. As a result, the arithmetic scale creates a rather steep trend displayed on the monthly view which appears first. It’s generally helpful to start with the strongest, longest-term trend which is more apparent on the chart with the greatest interval.
Figure 1 Monthly Bar Chart for INDU with Bullish Trend [10/2000 – 1/2013]
Both the 10-month SMA and regression channel clearly display a long-term bullish uptrend for INDU. Current price action is in the lower portion of the channel with INDU moving into resistance at the regression line. For now, the current declining trend volume (10-month SMA) suggests some possible difficulty at this area. Any pullback in INDU may find supported at its 10-month SMA.
Figure 2 Weekly Bar Chart for INDU with Bullish Trend [8/2009 – 1/2013]
The INDU has moved back into its long-term upward trending channel and has resumed a bullish intermediate trend as determined by an upward trending 20-week SMA. The trend is however slowing and the average has had two recent moves out of the channel. Renewed strength in the intermediate trend would favor a move to the middle regression line while a pullback would have support at both the lower boundary line and the 2-week SMA.
Figure 3 Daily Bar Chart for INDU with Bullish Trend [11/2011 – 1/2013]
Short-term to intermediate term trends for INDU are bullish as displayed by upward trending 20-day and 50-day SMAs, respectively. The current set-up for price and the SMAs also represent the most bullish one possible, with price above the shorter SMA which is above the longer SMA, all of which are in an uptrend. Price action returned to the long-term bullish regression channel and the first are to monitor is 13,610.15, the October high for INDU [10/5/2012].
Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
Questions for Clare? Please visit the discussion board on the homepage of Optionetics.com.