Another Low Volume Breakout

- Dugald Malcolm

Montreal, Canada.

Despite hopes for a much needed market correction back down to the 1,030 area, we will have to make do with February's 8.1% pullback - at least for now.

The day after my last update on February 24th, the S&P 500 managed to form a bullish signal in the form of another hammer on the candlestick chart. From there, the S&P 500 made its way through key resistance at the 1,115 level as well as the 50-day moving average just a few points below it. It seems the bears have yielded to the bulls with the S&P 500 closing yesterday just shy of 1,140, at 1,138.5. We are now 9% higher from the intraday low put in on February 5th.

The previously mentioned 1,115 level is significant not only because it represented such a long standing resistance during the sideways movement at the end of last year, but also because it appears to be the neckline for a Head-and-Shoulders Bottom. I emphasise, however, that it only appears to be so at this time. For it to be confirmed requires a close of at least 3% above the neckline, which would bring the S&P 500 just below its January highs of 1,150. What makes me hesitant in wanting to classify this pattern as a full-fledged reversal is the lack of volume that accompanied the break above 1,115. This rally since this date in March of last year has been plagued by low level breakouts, including the one that first broke above the 1,115 around Christmas. In Robert D. Edwards and John Magee's Technical Analysis of Stock Trends, a.k.a. the technical analyst's Bible, they write:

A low-volume breakout from a Bottom Pattern may only be premature, to be followed after more "work" around the Bottom levels by a genuine advance, or it may be a "false" move entirely. It pays generally to wait and see.

I would tend to agree with wanting to "wait and see" here. I would like to see a close above the previous high of 1,150.45 to be certain that this uptrend has any legs. I will also be keeping a close eye on the ADX, or the average directional index. For the average directional index to signal a trend, be it up or down, the ADX line must rise above 20. Currently, however, we are only at 18.55, suggesting the market is currently trendless.

The next line in the sand for the S&P 500 is at 1,150. We will see if the market will continue its low volume ascent or, perhaps, if a double top formation is formed here.

Average rating
(4 votes)