If you’ve been watching the Voodoo Lines, you might have noticed that several major indices are approaching their upper firelines. This includes the S&P 500 closing in on 3,876.63, the NASDAQ 100 approaching 13,764.20, even the S&P 100 near 1,763.65. Over in Europe, the Euro Stoxx 50 futures are also approaching a Voodoo fireline at 3661, but it isn’t the uppermost fireline.
There are a couple of reasons we should pay attention to this developing situation:
1. Firelines are the most important support and resistance levels offered by the Voodoo Lines. While that doesn’t mean that markets have an imminent turn back down or that the bull market is out of gas, it does mean that we should pay attention to this area.
2. Above those nearby levels in SPX and NDX, users who rely on Voodoo Lines for support and resistance are without nearby guidance. So, we need to talk about how to evaluate trades in this environment and what to expect for future Voodoo Lines levels.
For those not familiar with the Voodoo Lines, they include a number of different levels produced by the indicator including the red firelines discussed above which are the most important levels. You can see a few of them on the chart of the S&P 500. Corresponding with their importance, they are relatively far apart and there are only three of them on the chart of the S&P 500 stretching back to early 2016.
There are a few more of the green treelines, which are the second most important set of levels, important enough that they marked important swing lows in December, 2019 and March, 2020 as well as important swing highs in February, 2020. White snowlines are the third most important of the Voodoo Lines levels and these found several other swings.
Based on the importance of the fireline at 3876.63 we want to be aware of the level but not overreact. A Voodoo Lines level, even a fireline, isn’t a reason by itself to oppose a trend. To figure out how to interpret these moves, let’s review common behaviors at important levels:
1. Reverse at a level like we saw the S&P 500 do at some of the cited treelines.
2. Break beyond the level and retest it from the other side before continuing.
3. Break beyond the level and just keep running (often this happens when breaking on a gap).
4. Consolidate around the level like the S&P 500 did around its 2650.58 fireline back in early 2018.
Let’s not try to predict what this market will do and instead prepare to read the market’s behavior if and when it reaches these important levels. Failure to continue to push up after reaching a fireline is a good reason to lighten up on long positions. To get short, however, we would need something more, either some other indication of a top, or price action which starts to systematically break below lower and lower Voodoo Lines levels.
Reversals don’t need to happen at Voodoo Lines to the tick. They could come from a little below or a little above. A small move above upper firelines won’t immediately signal an all clear for bulls. But testing the fireline from above and then holding the level would allow for bullishness so long as prices stay above that fireline. This test from above which holds would also rehabilitate the bullish view if prices had previously stalled.
The chart of the NDX also has put in important swings at important Voodoo Lines so I am watching it as it approaches its uppermost fireline at 13,764.20. Add to this growing indications that markets appear extended and toppy and I am cautious. But just like the Voodoo firelines, this doesn’t signal a top; just a reason for caution.
The way I am handling these warnings is to shorten timeframes, cut back trading size, and trailing up stops. But I am not giving up on the bullish side of markets without a clearer sign.
If indices find support above their upper firelines, I will not only have a reason to refresh a bullish outlook, but I will also have a clear level of support to use to maintain that bullish view.
Finding support above the uppermost firelines will also necessitate updating the Voodoo Lines indicator with new levels. Levels are typically stable for long periods of time, but they do occasionally need to be updated and beyond the farthest fireline is one of the triggers for updates.
There are a few considerations which go into when the updates will come out. If you already use the Voodoo Lines, here’s what to expect if the highest levels are exceeded. If price breaks above a level, updates will usually wait until price has tested and held levels from above. The current settings have been exceptionally good at finding important swings in both the SPX and NDX. That’s why we don’t want to abandon them unless we are forced, and why we want to pay close attention to both 3876.63 and 13,764.20, even if price goes a little beyond.
Those levels could remain in play if price drops back below and establishes resistance, or by testing from above and holding. Either could be an important trade setup. But if and when price gets and holds above these levels, we’ll quickly get out updated levels. Once one of the indices clearly needs an update, the only thing which might briefly delay an update is waiting to see if the other index can be updated at the same time.
While waiting for those updates, if needed, the existing firelines can be used as support for bullishness.