Let’s step outside the noise and view a broader picture of the reference charts for “Color Market Structure” and Trend for the US S&P 500, US Dollar Index, along with leading commodities Gold and Crude Oil.
Structure Charts help us pinpoint the trend and help put our positions in a broader context.
We’ll start with the uptrending S&P 500:
When we discuss “Structure,” we’re detailing the trend as measured with the series of price highs and lows.
We’re encapsulating the trend with hand-drawn trendlines to connect as many swings as possible.
Also, we quantify “structure” by the length of the swings where small swings represent low volatility and stability while wide swings – which is what we’re seeing currently – represent imbalance/disequilibrium which shows up as an increase in volatility.
In that sense, we can describe trend structure as “Up, Down, or Sideways/Balanced” and also assess Volatility (stable or unstable).
The S&P 500 has enjoyed a strong, stable uptrend through all of 2013 and most of 2014.
However, swing structure turned “unstable” and volatile at the end of 2014 and this pattern continues today.
We’re seeing structure stabilize within the current multi-month (yellow) trading range between 2,000 and 2,060.
Notice the impressive, straight-up stability of the bullish trend in the US Dollar Index:
The Dollar’s trend was sideways (to down) through 2013 and 2014, but the breakout in structure mid-2014 set the foundation for one of the most stable (small price swings) yet vertical price trend.
Swing structure was persistently to the upside and that’s where we find the Dollar currently – trading back to the lower (narrow) trendline into the 94.00 area.
Remember that violations or breakouts from swing structure are the first step in a Trend Reversal process.
UNTIL a breakout occurs, we should assume that a trend in motion will likely continue.
A similar situation occurred in Crude Oil… yet in the opposite direction:
Structure was sideways to up with stable swings through 2013 and 2014 yet the end of 2014 saw the infamous breakdown under the $90.00 per barrel which set up the collapse in price, which developed as a stable (narrow swings) yet powerful downtrend.
Again, compare the trend structure and reversal (into “collapse”) of Oil with the US Dollar Index.
We’re seeing our first green swing since the October breakdown – meaning the price movement down can be considered a single “swing.”
Structure in Gold is more complicated than the other markets:
While gold prices endured a lengthy downtrend with volatile (unstable) swing structure through 2013, swing structure and the trend stabilized in a sideways-to-down environment through most of 2014.
However, price recently developed a green (bullish) swing and shattered the falling trendline established from 2013.
This is the first step in a possible Trend Reversal to the upside yet a full reversal won’t develop (by definition) until price crests above the $1,350 prior swing high.
If gold is to reverse higher in the future, it has already taken the positive steps to do so now.
Keep your focus on gold and its ability to remain above the $1,200 level.
Trend Structure helps cut the noise from indicators out of the picture and allows a focus on pure price.
For more daily updates from Corey, visit his blog at Afraid to Trade.com.