Sunday, February 8, 2009

Opening Range with Linear Regressions

The chart below is of the S&P 500 Index and has two sets of lines. The horizontal lines represent the opening range and its extension levels. The black lines define the opening range and the two red lines mark extensions off of this range. Once the market traded below the bottom of the opening range black line, the next target was one level down, the first red line. As the 800 level held, the market then tested this line a few times, and like last Friday, had a rally above it.

The downward sloping lines from left to right are the linear regression line and the corresponding standard deviations from this linear regression. Friday morning was an important morning in that the Unemployment Number was to be released at 8:30am eastern time. It was also important technically because the prices Thursday closed right that both the linear regression line and the first extension off of the opening range. Any trading above these lines accompanied by even the smallest amount of momentum, would lead to a strong short-covering rally and higher prices. The overall volume for the day was not very strong, so look for a choppy market next week. If Congress passes a stimulus bill, look for an opportunity to take profits on any rally and/or get short. Support should be around 840 for now, and resistance will be the lower part of the opening range, 890.

S&P 500 Index Futures Opening Range + Linear Regression (click to enlarge)

It is important to keep a longer term perspective and not get caught up in the hype of 200pt up days on the Dow 30. It seems like every positive day, experts on TV come out to say this is the start of the new bull market. Below is a chart of the S&P 500 Index. It is not a daily chart, but a three-day chart. Each candle represents 3 trading days. It clearly shows how small the rally was Friday in the big picture. It does also show that 800 looks to be holding strong, only time will tell how strong that 800 number is.

S&P 500 Index 3-Day Chart (click to enlarge)

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