S&P 500 To Remain in Trading Range? (August 7, 2007)

We've had quite some volatility recently. The Bollinger Band width of the S&P 500 ($SPX) is at a very high 156! I don't expect this kind of volatility to sustain itself. I estimate that the Bollinger Band Width will decrease, and the overall volatility will decrease for a while.

This means that the $SPX will most likely end up in a trading range, giving the market time to consolidate. On the low end, we can set 1427 as the support. On the upper end, we can set resistance to around 1492. This coincides with multiple attempts of the $SPX to break through it. It also is the 50% re-tracement from the recent July 2007 correction. If we have a stronger rally, we may reach the 61.8% retracement of the July 2007 correction of 1507.

From there, we could either break resistance and breakout of the trading range, or break support, and breakout to the downside.

Today's Chart of S&P 500 ($SPX)

Finisar (FNSR), a speculative under $4 stock looks like it was forgotten, but may now be poised to move upwards.

FNSR's 50 day moving average has gone above the 200 day moving average, the Golden Cross, and is a Bullish sign. FNSR is both above the 50 and 200 day moving average, and is currently in an ascending right triangle, a normally bullish formation. This pattern suggests accumulation by people as the stock moves lower, and the buying support increases each time, forming higher lows. Before the end of the triangle approaches, the stock may breakout with good volume above resistance. This would be an ideal Buy Point.

Other clues include a Bollinger Band Width of less than 0.5 which, in the past, has predicted a move in the stock (whether up or down).

The lower technical indicator is the Williams ADX Directional Movement Index. This is a trend following indictator. The Black line through the middle is the ADX. If the ADX is rising upwards, that means the stock is starting to trend. When the green line (+DI) goes above the red line (-DI), and when the green line is rising, and the red line is falling, that would be one of the buy signals. Note that great care has to be taken using this technical indicator. If the stock is not trending, using the red and green line crossover by itself could cause a lot of stock whipsaws. That's why the black ADX line is important in the system. There are many modifications to this system to reduce whipsaws.

In other words, watch out for the speculative stock Finisar (FNSR) as it may be ready to make a move upwards.

To see a real life example of a breakout of an Ascending Right Triangle, see the Chart of Hansen (HANS).

To monitor FNSR using the same metrics as my chart above, you can use this link.