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Cross-market analysis: Dow Jones / mini S&P500

These are all simple tools that you can use to get the most out of the information that is in front of you.  Cross-market analysis is another in a vast array.  We can see in Figure 13 that there is a double top formation on the Dow….but if we compare this to the mini S&P in Figure 14, we can clearly see a three-peak ND top.  Not so convincing from the Dow alone, but using the mini S&P to confirm, we get the complete picture.

The Bigger Picture

All the same rules apply for the longer-term picture.  Take a quick look at where we can get some support and resistance first. As a divergence set in early on, and continued throughout, it's reasonable to presume that there is support at 8480 - which coincides with the triangle target.  But why is this important?  Well, we need to be prepared to make a trading decision.  If we are aware that there we are in a target area with PD developing, we can be confident that there is strong support in this same area.

Putting it all together

The early bull flag here (Figure 16) at 15:00 signalled a good entry on the break, but soon became quite volatile, requiring a sharp eye to get out and short, before taking on the "safe" long (3 options around 8020).

The triangle then set the target for the rise to 8090, which was duly delivered and also set up the first part of the Negative Divergence top.  As it turned out, there were multiple exits possible here, all within a few points, ending with the fourth peak.   The safe entry short was soon confirmed after that, and a rapid drop to 8025 followed. The only clues for a possible early exit here was the RS switch in both CCI and RSI.

Another good trading day, with plenty of action, to see how it all fits together (Figure 17).

Be patient and wait for something to develop in TA to get some pointers as to where we were going.

The signals eventually developed, giving three separate targets between 8305 and 8310. First, the triangle, and then the bull flags - and then the pullback. All went well until 8310, when you should have spotted two things developing.

1. A possible H&S developed. This became void at 20:09 as the price pulled away from the support (shown on chart). 8301 was the target.

2. The peak at 8317 should have got you looking for possible divergences setting in, which there was, in both CCI and RSI.

Now here's the crunch. One would have expected a third rise to complete the negative divergence. It didn't happen. The time frame was correct at 24 minutes. As soon as the price broke the support line from the H&S, that should have made you hit the sell button. I got out here for a measly 2 points. If you missed that exit, you would only have lost 30 points max from there... so no big deal.  Those that got in early should have made close on 100 points.

Conclusion

The methodologies shown here should give you enough information to form the basis of a profitable trading strategy - but remember, there are no guarantees in trading and the success or failure of any one person will depend on many factors. All trading is, of course, high risk and you should never trade with money you can't afford to lose.

The “rules” of the strategy can change over time as the markets themselves change with new players each day, and since this strategy was originally written in 2003, there have been some substantial changes in the way the markets work. There has been the Iraq conflict, which still affects the markets quite dramatically from time to time, and the recent US Presidential Elections. All these factors and more can blow your TA clean out of the water, and you should factor them into your trading. Be careful trading around news announcements (typically these are 10am EST), and know what announcements are coming up during the trading day. As always, if you have any questions, feel free to raise them on the forums.