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Tuesday
Mar202012

Emini Futures | Trend Line Basics

(QQQQ)(DIA)(SPY)(GLD)(SLV)

Emini Podcast

The S&P500 Emini Futures continued to climb despite weak housing start numbers. How long will this trend stay intact? As with all trends... until it's broken.

Trend Line Basics

Trend lines are simple yet powerful tools. They are used to highlight the general direction of price movement for whatever time frame is currently being observed. Trend lines are based on the idea that price moves in trends either up or down. It is assumed by technical analysis and common sense that prices will continue in the direction of the trend until the trend is broken.

When drawing trend lines we suggest that you observe the trend in 3 time frames. The time frames you use are relevant only to the time frame you are actually trading. For the purposes of day trading it is a good idea to draw trend lines on a daily chart, an hourly chart and then on the time frame you are using to execute your trades. Volume, or ticks, or even range bars can be substituted for the time element but for today we will stick with just the trend line basics.

Think of trend lines as wind at your back or the current of a river. Running into a headwind or swimming upstream can certainly build character but making progress is difficult at best. Learning to simply "go with the flow" is at the very heart of trend line trading.

Trend Line Defined:

Trend Lines are nothing more than straight lines drawn on a chart connecting two price highs or two price lows.

You must have two points to draw the initial trend line and a third point then confirms the validity of the line. The trend line becomes more significant as more prices touch the line without breaking above or below and holding for a number of bars relevant to the time frame being observed

There are three types of trends:

  1.  Bearish (down slope)
  2.  Bullish (up slope)
  3.  Range (sideways)

The primary use of a trend line is to identify the start or existence of a trend, and to help you see when or if the trend itself is changing. Do not become overburdened with drawing the perfect trend line. Just start connecting swing highs and swing lows on your chart. Over time and with practice, you will start to see some rather amazing things happen on your Emini Charts.

S&P500 Emini Futures Daily Chart 03/20/12

 

SP500 Emini Hourly Chart 03/20/12S&P500 Emini Hourly Chart 03/20/12

 

SP500 Emini 5 Minute Chart 03/20/12S&P500 Emini 5 Minute Chart 03/20/12

 

The above charts were all captured within minutes of each other. On the daily chart we can clearly see the strong uptrend the market is in. Based on the daily chart, price could drop to 1360 (over 40 points) and the longer term trend would remain intact. On the hourly chart the break point is at 1402.25 and currently being challenged. As we drop down to the final chart, we see that on a 5 minute time frame, we are in fact already in a down trend. The breakpoint of the 5 minute trend line is now being challenged.

The question to ask yourself is this - "Is the 5 minute chart in charge or is the larger time frame?"

While it is true that if we are going to experience a reversal it will show up first on the 5 minute chart. An ideal scenario would be to see the test of the hourly hold, catch a reversal on the 5 minute and keep the wind at your back. Another worthy scenario would be that the hourly breaks and the door opens for a sizable move on the downside. Now that you know exactly what is happening in 3 different time frames, sketch out what the possibilities might be, and then check your charts tomorrow morning to see how it played out. We will post more trend line charts tomorrow night and discuss the price channel as well.

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Emini Podcast for Tuesday 03/20/12

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