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    A Rising Tide Floats All Boats

    By Epeng | May 14, 2007




    In the past two months, you could’ve thrown a dart at the ocean of stock tickers out there and it most likely rose. In the coming week or two, however, the saying “a rising tide floats all boats” may well turn around. If the market indices start breaking down, it won’t matter if you’re picking the best stock ever, it’ll fall with the tide, just like the rest of them. Therefore, it’s always important that before you jump into the market, you have a good idea of where the market has been and where it’s headed.

    A good place to start is by analyzing the major market indices: S&P500, DJIA, and the NASDAQ. Let’s take a deeper look into the S&P500…

    SP500 technical analysis chart

    I want to emphasize three very common technical analysis techniques that you can easily add to your trading toolbox:

    1. Support/Resistance
    Support and resistance lines are strong indicators of investor psychology. As you can see in the chart, the price action has oscillated within the support and resistance lines. In fact, the price is converging to a point where the support and resistance lines intersect. This junction is crucial because if the price breaks down through the support line, we could easily see the S&P plummeting back to the 1400-1450 levels (3-7% drop). On the other hand, if the price breaks up through the resistance line, we could see the current bull trend continue.

    2. RSI
    RSI (Relative Strength Index) is a momentum indicator that measures how overbought or oversold a particular security is. A RSI reading of over 70 implies that the market is overbought whereas a RSI reading of under 30 implies that the market is oversold. A consistent RSI reading between 50 and 70 indicates a healthy, rising stock. As you can see in the chart, the S&P was recently in the overbought range, a bearish indication.

    3. MACD
    MACD (Moving Average Convergence-Divergence) follows the basic idea of moving average crossovers, but gives you a better visual and trigger point. In essence, when the red line (9-day EMA) crosses over the black line (12-day EMA minus 26-day EMA), there’s a change in sentiment that indicates the current trend might be over. In the S&P, you can see a recent crossover, so the current bullish trend may have reached a peak.

    Conclusion

    Given that the S&P is reaching a crucial point in the support/resistance lines, the RSI indicates overbought levels, and the MACD indicates a potential end to the current bullish trend, we need to carefully monitor the market averages in the upcoming week or two. Remember, you should always have an idea of where the markets are headed before you pick out individual stocks because a rising tide floats all boats – and a falling tide sinks all boats.

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