The TSX 60 recaptures the 20 moving average--just barely...

Today the TSX 60 index recaptured the daily 20 moving average. You'll recall from my analysis earlier this week that I was calling for a float up into the 780 gap fill area. Since then we've seen exactly that and closed today significantly higher at 783.11--just .60 points above the 20 moving average. Because the recapture is so slight, it's difficult to tell if it represents a true breakout or a minor pierce signalling a move lower.

Despite this recapture, there is still a lot of resistance at these levels. Going forward into Friday and early next week I will be looking for a followthrough move to the upside or downside, thereby confirming the levels as cleared or continued resistance. In the meantime, my outlook on the TSX 60 will remain neutral.

The TSX 60 walks a thin line

The TSX 60 index is walking a thin line after breaking a key trend line on the daily chart. This represents a significant breakdown and could foretell of more downside in the near future.

This trend line has acted as support since a bottom was formed by the lows of August 8th. This means that whatever strength was there to lift it after it fell steeply in late July and early August is gone. It also means that the bear wedge formed by the fall and subsequent sharp bounce has triggered.

Going forward, there are two scenarios that can play out that will lead to more downside--assuming we don't fall more tomorrow. The first sees us trade up into the 20 moving average, 780 gap fill resistance area and then pulling back. The second involves trading sideways for several days and then ultimately breaking down. In the event of further downside, it is very likely that the TSX goes at least to the pivot low at 732 and probably much lower.

In the meantime, I'm favouring sideways to upside trading. After a major breakdown such as this it's typical for the market to retrace back to the initial breakdown area before falling further. I'm also biased towards short term upside on the TSX because of the major trend line recapture that happened on Monday on the S&P 500 in the US. 

SPX trend line recapture

In any case, just remember that the market is weak right now and any bounces should be quick and can be used as shorting opportunities. Bearishness on the TSX 60 will be negated if it can recapture the 20 and 50 daily moving averages.

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The only thing that matters on the S&P 500

I apologize for not posting here in over a week. This blog is meant primarily as a place for me to share longer term swing trade idea, but this kind of volatile market has simply not been conducive to that. This kind of market is best traded on a scalping basis and with good deal of caution.

With that being said, I am watching the longer term forecast for the S&P 500 very closely. As I've posted several times before, I will maintain an upside bias until certain technical factors change. Right now, the one technical factor I'm watching is the bottom trend line on the SPY daily chart (in green below).

As far as I'm concerned, if this trend line holds, the market may continue to trade higher. If it breaks, stocks will almost certainly trade lower. Interestingly, the SPY hit this level almost exactly late on Friday and just barely held. Monday will be important test in determining if we bounce into the next several days or begin to trade down.

It's also important to note that we are trading within a macro bear wedge (sharp down move followed by a secondary move sharply higher), as I've mentioned previously. This means that it's only a matter of time before the market breaks, and a break of this green trend line could be a foretelling indicator of that happening.

No change in outlook for S&P 500

This weekend I posted that I'm expecting some short term upside on the major market indices based on sideways consolidation on their daily charts. My position remains unchanged as we've seen this scenario play out.

Yesterday the S&P 500 traded up sharply and today closed flat. If we see another one or two days of flat to moderate downside trading, I expect to see another leg up into resistance at the 1250 level. I will look to short a hit or break of this level as it will complete the macro bear wedge that's been forming on the daily chart.

If we don't see consolidation, either by a large move up or down this week, I will switch to a neutral bias on the markets and will not hold any overnight positions. Ideally, any consolidation will take place within the range of the large up move created by Monday's rally.

What to expect from the S&P 500 this week

This week the S&P 500 is positioning for a possible move to the upside. Since the week before last, the market has bounced considerably from the 1120 level and is trading sideways under the daily 20 moving average. As long as this sideways consolidation continues, a small bullish flag pattern has the potential to play out.

SPX consolidating micro bull flag for potential move up

A move up will have very little resistance until the 1250 level, at which point it will likely pullback. I will look to short a hit or break of this level. There will also be minor resistance at the pivot high at 1210 and the 50% fib at 1224.

My upside bias is unchanged since I suggested that a short term bottom for stocks was in after the bounce of August 8.  I also think that any movement up will serve to consolidate a macro bear flag formed since the large drop in late July.

If the market fails to move up and closes below the low of 1100, the bear flag will trigger and I will change my outlook to bearish. This is a distinct possibility as the markets are still rattled by European and American debt issues. Now more than ever, it's important to trade all up moves very carefully.

Key medium term breakout area for TSX 60

The TSX 60 index may have some upside in its future if it can make it above a key trend line. This trend line connects the highs from July 25 to the pivot high from August 17, as outlined in the chart below.

A break of this trend line could lead to medium term upside

Since Wednesday of last week, the TSX 60 index has been consolidating sideways underneath this trend line. This resulting bullish flag pattern means that the trend line should provide only minimum resistance.

A breakout above this trend line would be significant as this is a medium term 60 minute chart. I'll be looking to go long here for 1-3 days depending on how fast the price moves up. First resistance on any such breakout will be at the 200 moving average and the gap fill at 795. Secondary resistance will be at the pivot top at 804. A close back below the blue trend line triggers a stop out.

The XIU.to ETF is a good way to play this breakout, as well as individual stocks. If I find any stocks with supporting bullish patterns I'll post them here.

Trend line breakouts--identifying prevalent patterns

Every day I see hundreds of chart patterns play out. Some patterns I take note of while other less reliable ones I ignore. This can vary on a weekly or even daily basis. Today, my chart pattern of choice was the trend line breakout.

To find a trend line, simply connect multiple highs or lows with a line--the more pivots that connect, the better the trend line. Notice how this works on the SPY intraday chart below. I personally played this breakout for a move to approximately 115.25.

SPY 10 min shows clear break of trend line leading to higher prices

Trend lines are a useful addition to any trader's repertoire due to their reliability and straightforwardness in knowing when the trade is working in your favour or not. A break above the trend line is the buy signal and a break back below is the stop out.

Once a trend line has been identified on one of the major indices it's very likely that this pattern will repeat itself on individual stocks. The following charts are trades I took in sympathy to the SPY pattern above.

Notice the POT.to trend line double as an inverse head and shoulders pattern

Trend lines can also be bought on a retest of the initial breakout

The 200MA was the logical target on this SU.to trend line breakout

Identifying prevalent patterns from one day to the next is just as important as identifying key active stocks and sectors. When you see a pattern playing out in the major indices and key large cap stocks, you'll likely see it elsewhere as well. This is a strategy I use in my own trading every day.