Determining the market trend is a very important activity to be performed when we analyze an index behavior.
Double Top and Double Bottom
When we talk about a double bottom or a double top we talk about market trend patterns. A double bottom is very often a fabulous buying opportunity. We observe a double bottom by fixing a significant low in the immediate past(a few months) and then we see the market moving up and coming back to about the same level as this same low. To be significant the distance between the two lows must be at least 12 days. As an example we had a double bottom between end of august 1998 and mid-October 1998 on the SP500 and this double bottom triggered a 20% up swing.
Here is a graphic example
The double top is the opposite of the double bottom and it calls for a possible market correction. To use it however we must wait for the market to fall half way or lower between the Upper Band and the Lower Band. As an example take a double top that occurred with SP500 between October 1997 and beginning of December 1997. This double top called for a market set back to the lower band.
Here is a graphic example
Support and Resistance
Support and resistance also talk about market trend patterns.
A support point is a point that has not been penetrated on the down side for a long time. Usually we can even see on the graphic one or more attempts to break it. As an example we can say that in year 1992, 400 on SP500 was a very solid support point because it was established in april 1992 and was tested successfully in june and october 1992 which makes it a very significant support point.
Here is a graphic example
On the other hand a resistance point is a point that has not been penetrated on the upside for a long time. As an example we can observe that in 1992 for SP500 420 - 425 was a very strong resistance point and we saw that level penetrated only in late December 1992.
Observe the market Trend
By observing the trend you can establish if the market is making higher significant lows or lower significant highs on short term or long term basis. Is the market in a trading range which means is the market moving always in the same range. For example in 1992 SP500 moves between 400 and 420 for almost all year before we could observe a breakout above that range at the end of the year.
Is the market moving inside a downhill or uphill channel. For example SP500 moves in a downhill channel from the beginning of year 2000 up to mid march 2000. We can observe a channel like this one by noticing lower significant highs and lower significant lows. We have the opposite with an uphill channel.
Here is a graphic example of a downhill channel
We can also observe a change in trend when we have either a channel being broken out or when we have a higher significant low in the case of a downhill channel. If we take again the same period we can see that at the beginning of march 2000 we had a higher significantly low compared to the one we had in the last week of February.
Just remember that market trend analysis is not so complicated and when you apply those simple base principles especially with our index trading system you will make profit more then you can dream of.
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