Australia 200 and US SPX 500 - Index set ups using trend lines and Bollinger Bands

Australia 200 and US SPX 500 - Index set ups using trend lines and Bollinger Bands

As we move into Monday’s meeting of European Finance Ministers, the Australia 200 index and US SPX 500 charts look interestingly placed.

As you can see on the chart below both indices are currently testing well established trend lines.

This situation where critical news events and technical levels coincide can be helpful in turning market events into practical trading opportunity.  The response to the technical levels can help provide early insight into whether the news is likely to lead to a significant price move and tradeable opportunity.

For trend line traders, there are 2 possibilities here.

  • Buying on a confirmed rejection of the trend line support
  • Selling if the news is bad enough to cause a clear break below the line.

The Australia 200 4 hour chart also looks to be in the early stages of what may be a Bollinger Band buy set up providing an early entry opportunity for swing traders monitoring the market between now and Monday’s meeting.

The first chart below is the daily US SPX 500. As I noted in my Monday morning share commentary post, this has been in a strong impulsive uptrend and is well above its 200 day moving average (green line). On Thursday it came back to test the support line of the extension up trend channel that has been in place since early January.

A move above Thursday's close would represent another rejection of the channel support with potential for the extension rally to continue.

Conversely, a break out of the channel to the downside could set us up for a worthwhile move lower.

The Australia 200 broke through the bottom of its trend channel support last week, courtesy of the Reserve Bank, a strong Australian Dollar and a so far uninspiring reporting season. However, it has now arrived at the major uptrend that has been in place since October last year.

Again, typical strategy here would be to buy on confined rejection of the trend line or sell if there is a break below it.

My final chart is the Australia 200 in the swing traders 4 hour time frame. This overlays Bollinger Bands (blue lines) and looks to have early potential as an example of the ”W" reversal set up we often feature in the blog.

This set up involves a downtrend leading into a trend trough under the lower Bollinger Band. This has already occurred as shown in the first circle. This trend trough under the band indicates strong downward momentum.

With this strategy a buy set up is indicated by

  • a corrective rally to that fails to close through the  middle Bollinger Band (moving average) and then
  •  Second trend trough made above the lower band. This indicates lower momentum and typical re testing behaviour that often comes before a trend change

Swing traders would typically be use this situation as an early entry on a trend line buy in the higher daily time frame.

A typical strategy on risk management would be to place the initial stop loss just below the 2nd trend trough.

If we get set ups on any of these strategies, I'll post a follow up with some thoughts on stop loss management and profit objectives.



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