Market Analysis for Sep 18th, 2003

Channel Breakout Could be Sell Signal
By Mike Paulenoff,

It's been a wild day so far. The markets overnight sagged a bit, continuing some late-session weakness from yesterday, and it looked like they wanted to break some important support levels. For example, in the S&P E-Minis, it looked like 1022 was under assault and would be broken, but the market pivoted there right above it at 1023 and change and rocketed it to the 1035-36 area.

A similar thing occurred on Nasdaq. The Nasdaq E-Mini was actually weaker than the S&P in pre-market this morning, got down to 1370, which was a key level for us on a micro basis, and then pivoted to the upside and rocketed to a high intraday so far at around 1398. In both cases, using intraday chart parameters and hourly work, you'll see that both indices rocketed today from the lower to the upper part of a trading channel that started back on September 12 of last week. The resistance lines of these channels come through at about 1035-36 on the S&P and right around 1396 in the Nasdaq on the December contracts.

So far those top channel lines have created enough formidable resistance to thwart further upside movement in the indices. What typically happens in channel work is that although the indices may have hit the top of the channel and it looks like the channel has put a lid on upside price action, typically there's a rest period -- in this case, let's say 1-3 hours -- and then another surge to the upside that actually breaks through the top of the channel. Traders and investors who are less familiar with channel work will actually buy the breakout of the top of the channel, when in fact a breakout of the top of the channel usually is a sell signal. It's usually a bull trap and the market reverses from there.

So we'll have to see what happens later today, but I expect the S&P perhaps to get to 1037-38 and the Nasdaq perhaps to 1402-03 in the December contracts before they run out of gas. Instead of being a new buy signal up there, my sense is it'll be a signal to take profits for those who are long and for some people to speculate on new short positions.

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