S&P 500 Riding Above Long Term Keltner Channel Structure

Following up from prior research “Research on Buying or Fading Breakouts from the Keltner Channel,” let’s take a different perspective and view the S&P 500 from the perspective of a longer-term Keltner Channel indicator.

Here’s the S&P 500 with an expanded Keltner Channel (ATR) Band…

While the standard Keltner Channel indicator calculates and displays two times the 14 (or 20) period “average true range” (ATR) and plots the result above and beneath the 14 (or 20) period mean (average), it’s helpful to view additional values beyond the default calculations.

The customized Keltner Channel indicator above calculates the 100 day average and plots six times the daily Average True Range (ATR) value. The indicator is similar to the popular Bollinger Band indicator which calculates then plots the Standard Deviation as opposed to the ATR value.

Calculation aside, we see the longer term expanded Keltner Channel with respect to the price movement from 2012 to present.

I highlighted the times when price traded into and through the upper Keltner Channel band. Price traded down to the lower channel one time in mid-2012.

Traditional logic suggests that a market touching an upper Keltner Channel is “overextended” and due for a pullback. Indeed we see this to be true, particularly through 2012, but broader research on default Keltner Channels from 2009 to present tends to favor buying impulsive breakouts as opposed to “fading” them by triggering a short-sale trade.

Price even “rode” (traded) above the upper longer-term Keltner Channel indicator in early 2013 and later 2013.

Note the downward movement away from the upper Band toward the ‘midpoint’ or 100 day average during the middle point of 2013.

For now, we’ll reference this chart and the extended Keltner Channel indicator. Feel free to use your own custom values – of both the “lookback” period and the number of ATRs to calculate – for additional perspectives of the current bull market trend structure in the S&P 500.

For more daily updates from Corey, visit his blog at Afraid to Trade.com.