Technical Analysis Lessons From S&P 500's Rally In July 2018

In this lesson, we will investigate and learn why the S&P 500 had a nice rally in July 2018 after a correction in June 2018. We will learn how the charts and technicals hinted of a bullish reversal.

After you learn the lessons here, you will understand why dips are buyable. You will also be able to spot the next bullish rally.

Dips In An Uptrend Are Buyable, But Where?

If you turn on the financial news channel, you might sometimes hear the experts saying that "this dip is a buying opportunity".

"Buy on dips, sell on rallies", are easier said than done.

While we all know that the way to make money is to buy low and sell high, where and when are the correct points to buy? That is the question that one needs to answer very well in order to make money in the stock market.

The first thing that you need to know is which dips are buyable...

Well,

Dips on uptrends are buyable.

The next question is...

How do I know that an index or a stock is in an uptrend?

An index is considered to be in an uptrend when they are making higher highs and higher lows. You will see this manifest itself in the chart by the way the index is travelling. It moves from the lower left to the upper right.

I have highlighted the higher lows with HL on the chart above. Notice how each time the S&P 500 dropped, it manages to reverse back up at a place higher than the previous low?

This is what we call making higher lows.

By the time the S&P 500 corrected in June 2018, there was already 3 higher lows in this chart. The index is already in an uptrend. The other thing to note is that the S&P 500 has gone back above its 20 MA and 50 MA.

The faster MA (20 MA) is above the slower MA (50 MA) and this generally tells us that the environment is a bullish one. You can see how the S&P 500 stayed above these 2 MAs until February 2018 when it slashed through those 2 MAs. From there on, the S&P 500 was in a very volatile and negative environment.

It is only until after May 2018 that the index manage to have a bullish cross and go back above the 2 MAs. I actually did an analysis in the past (May 2018) titled Dow Finally Makes A Bullish Cross, More Bulls To Come. Since then the markets have risen quite a bit. The Dow has risen just slightly but the S&P 500 and Nasdaq has gone up more.

Coming back to today's lesson...

Why did the S&P 500 rally in July 2018?

Well, first of all, this correction dropped to an area of support. 

The congestion area which I have shaded in green provides a support area to the index. Secondly, the index dropped to the important 50 MA which acts as a support as well.

Support And Resistance In StocksSubjective Support And Resistance In Stocks.

I like the 50 MA very much. Whenever an index or a stock drops to its rising 50 MA, I will usually take a look at it and try to see if the stock can find support there and rally back up.

There is also a bottoming tail bullish reversal candlestick pattern that appear at the 50 MA. The combination of price support, subjective 50 MA support and a bullish reversal Japanese candlestick all hinted to the possibility of a bullish rally in July 2018.

Using The S&P 500 ETF (SPY) To Do Analysis

The previous chart that I showed you is actually the futures chart of the S&P 500. While we can learn a lot from and also make trading decision solely on it, we can actually use the S&P 500 ETF to look for more clues.

The S&P 500 ETF is called SPY.

You can trade the SPY like a stock. The SPY mimics the performance of the S&P 500 index.

The chart above is the daily chart of the SPY.

The SPY also dropped to its rising 50 MA and this provided a basis for traders to look for a bullish reversal. The SPY also had an uptrend line support.

Trendlines are subjective support but they can often be very powerful. They are subjective because trendlines are drawn differently by different traders. But nevertheless, they are still very powerful.

How To Draw A Trendline And Use It To Analyze Stocks 

In this chart I have put in two oscillators. They are the stochastics and the MACD.

The stochastics was oversold and therefore it hints to us that a reversal to the upside is likely. The MACD Histogram has formed a valley and then it shortened. This told us that bearish momentum is slowing down.

We can also draw a short term downtrend line and when the SPY broke above the short term downtrend line, this hinted to a change in short term trend.

Look For Clues In The 60 Min Timeframe

Once we have established that the daily charts hint of a possible reversal, it is always a good idea to zoom into the lower timeframes to look for more clues.

The chart above shows the 60 min chart of SPY.

Notice how the SPY broke above the short term downtrend line. The other thing is the SPY actually formed a 60 min symmetrical triangle. SPY broke above the pattern and this hinted of a bullish rally.

A symmetrical triangle can be a continuation pattern or a reversal pattern. This chart pattern happens when there is a period of indecisiveness in the market. The direction it breaks out of will hint to where the stock or market wants to go.

In this case, the SPY broke out above the pattern and this hinted of a bullish rally.

There is also a bullish cross in the 60 min chart. This is where the 60 min 20 MA cross back above the 50 MA. Notice how the SPY stayed below the 50 MA during its correction. When it went back above the 50 MA, this told us that the trend has shifted.

That's all for this lesson.

Hope you gain more insight into why markets rally.

Charts with the Freestockcharts.com label are courtesy of Freestockcharts.com

Charts with the investing.com logo are courtesy of Investing.com powered by Trading View

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