COMPARING SIDEWAYS AND ROLLING BREAKOUT METHODS

There is no doubt that an intelligent technical trader could identify the sideways patterns better than the computer, but the computer can do it faster and give you the chance to trade a more diversified group of stocks and futures. That’s important and we’ll discuss that as we move forward. Let’s now try to follow the weekly S&P 500 prices during the strong upward move from 1994 to 1997 by drawing sideways ranges manually and comparing the results to a rolling breakout. It’s difficult to be objective when looking back at the entire picture, but let’s try:

1. The sideways period from April 1994 through February 1995 is very clear. The lows form a support line and the highs in March, September, and October (A, B, C) form resistance. The resistance line is drawn across the highest high, point B, but we could have lowered that to cross A and C, cutting the top off at B. Cutting the tops off is the better way.
2. We get a breakout to the upside in mid-February. The rolling 30-week breakout also gets a buy signal because prices move over point B, which is within the past 30 weeks.
3. The steady move up doesn’t require any decisions until the sideways period, beginning in July 1995, has a sharply lower move in October. We don’t see the sideways pattern until prices start to fall to point H, the lowest level of the pattern.
4. The decline to H stops at exactly the same level as D, but we may have sold when prices first broke through the line formed by F. We may have drawn a support line connecting the two lows on both sides of F. If we sold at the first line, we take a profit of about 115 points and then sell short.
5. If we’re fast, we sell at the thin support line crossing at F, and then see prices stop at the major support line drawn from D to H. Prices rebound higher, and we realized that support held and we need to get net long again. The new high is at 950, at which point we would be sure the uptrend has resumed but take a 60-point loss in the S&P.
6. You may have waited for the major support line at H to be broken and remained long. Prices would have dropped from 950 to about 870, a loss of 8.4 percent. Would you have been able to wait that long? Not likely.