With US Equity Indexes challenging and breaking to new recovery highs, it can be helpful to take a moment to raise your perspective to the monthly chart frame.

Let’s take a quick look at the monthly index charts, starting with the S&P 500:

The S&P 500 lags the Dow and NASDAQ at the moment, as it has not yet broken officially to new recovery highs beyond the May 2011 peak (1,370).

Nevertheless, we can see the bigger picture structure over the last 15 years in the chart above.

The key “narrative” highlights would be the pre-2000 “Tech Bubble” run-up, post 2000 crash and recession, stable recovery into the 2007 peak, 2008 financial crisis, and the current liquidity-infused recovery.

We’ll also discuss a chart-based theme regarding “Open Air” on further bullish movement above these key chart levels.

Next, the Dow Jones Index:

Interestingly, when compared to the S&P 500, the Dow Jones had less of a severe decline during the 2000 to 2003 bear market and a stronger recovery from 2003 to the 2007 peak.

The 2008 crisis bear market and 2009 to present recovery are structurally similar, except that the Dow Jones broke to new recovery highs this week.

The NASDAQ has the most unusual historical chart of the three big indexes, due to the 2000 period:

The 2000 period centered around the “Tech Bubble” run-up to the 5,000 index peak and subsequent Tech Crash from 5,000 to 1,250.

Beyond the steepness of the spike and fall at the beginning of the decade, the NASDAQ has one more unique quality when compared to the Dow and S&P 500:

The NASDAQ has twice pushed to new recovery highs ABOVE the 2007 peak, bringing the NASDAQ into price territory not seen since 2001’s crash period.

What’s the Main Idea Now?

As mentioned in prior posts, “Creeper Trends” can carry price further than many traders think it can go.

It can be financially devastating to fight a strong – or even creeper – trend in price.

As price breaks visual (obvious) resistance areas on the charts, it forces traders to make adjustments accordingly, particularly the higher price travels beyond these levels.

Short-sellers must determine how much conviction they have in their positions, and set a point where they will liquidate their positions.

Sidelined investors and traders may interpret a break to new recovery highs, and the media attention that accompanies it, as a reason to invest more money into the stock market (put on new positions) or else add additional capital to existing positions.

Either way, sustained breakouts tend to propel prices even higher as these traders and investors interact – some gladly entering new positions; others sadly exiting losing positions.

You can look to prior ‘Big Picture” levels to see how this situation played out, particularly during the low-volatility “Creeper Trend” from 2004 to 2006.

The indexes took a powerful run higher into the 2007 peak.

A similar powerful breakout/sustained rally occurred in late 2010 on the firm breakthroughs above the 2010 “Flash Crash” April highs.

From an unbiased game-planning perspective, if sellers do not stop the advances in the markets into these “obvious” price levels, we may very well see a Paradigm Shift that propels these indexes through the “Open Air” above the 2011 highs in a similar method as past “major” breakouts.

Key levels are often Battle Zones for buyers and sellers… but eventually one side wins the battle.

If the bulls win here at the “Battle for New Recovery Highs,” then we may be watching history in the making as the indexes begin a new journey towards their 2007 peaks… which the NASDAQ has already accomplished.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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This morning’s better than expected Jobs Report sent US Equity Indexes into or above key target areas that – if the momentum continues as it appears currently – will break price into New Recovery High territory which you’ll want to monitor closely.

Let’s take a look at the S&P 500, Dow Jones, and NASDAQ to compare current structure and what may occur on a breakthrough beyond these prior high resistance levels.

First, the S&P 500 Daily Chart:

The S&P 500 lags behind both the Dow Jones and NASDAQ currently, both of which already are testing (or breaking) their May 2011 price high.

The S&P has two little levels of overhead resistance from prior swing highs in July to overcome before breaking through to new recovery highs.

In terms of the broader picture, the main idea is that any continued push beyond these 2011 level opens the price pathway into “Open Air” which raises the expectation that price will continue moving higher into past resistance targets.

To see that on the weekly chart, let’s view the S&P 500 Weekly Perspective:

The S&P has nominal resistance into 1,350 and the 2011 prior price high is 1,370.

A breakthrough above these levels opens the door towards 1,400’s Round Number target and then into April 2008’s 1,440 target.

Should we see a future breakthrough above 1,440, then 1,500 extends to the new target and so on.

The situation is roughly the same in the two other US Equity Indexes, so let’s take a quick view of them.

The Dow Jones – as of this morning – fell just a few points shy of breaking through its 12,876 prior high from 2011 but that factor could change quickly.

A firm breakthrough soon above 12,900 suggests 13,000 will again be realized, and beyond that extends the target towards 13,500.

Yes, there are negative momentum and volume divergences in all indexes, but price in a strong trend – particularly the “Creeper Trends” we’ve been seeing lately – can overrule or overpower signals from any indicator.

It’s another way to say “Price is King” – these creeper trends remind us of that fact.

Finally, here’s a quick look at the NASDAQ which did break to new recovery highs today:

While the NASDAQ pushed to new recovery highs this morning, the key “round number” to watch is 2,900 for easy reference.

Here’s the Main Ideas from a simple charting and trading standpoint:

Either the indexes will continue their impulse/rally higher and thus break through these important levels, or else we’ll see yet another reversal lower.

Should the indexes continue their rallies and break through, we would look to play bullish developments into the “Open Air” beyond these levels.

However, if again these key prior resistance levels again hold, we would be cautious from the long side and aggressive/short-term traders may decide to play bearish set-ups on a movement down from these levels.

This type of logic helps us create our real-time planning (game-plan) for whatever style trading we use (swing, intraday, position).

Don’t get caught in either bias that price MUST break through these indexes or that price MUST reverse lower – price (supply/demand imbalance) will do whatever it does, with or without us as traders.

Reference these key levels and their importance to the bigger picture of the broader equity markets.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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I hope you can join us this afternoon, January 31st shortly after market close – 4:30 EST/3:30 CST – for an interactive, educational webinar.

(UPDATE:  The links below are updated to the archive presentation you can view)

I’ll be answering common trader questions and describing how exactly to combine two timeframes to assist your trading decisions.

I’ll also show common mistakes of assessing two or more timeframes (and the “paralysis by analysis” that often develops).

Sponsored by Trader Kingdom, ICE Futures, and Mirus Futures, here is the direct link to attend:

“Two-Timeframe Trading Tactics and Set-ups”

January 31, 2012 at 4:30pm EST/3:30pm CST

Here’s a broader description of the webinar:

Join Corey Rosenbloom, CMT, as he addresses these questions and outlines how traders can capitalize on opportunities created by a conflict between two timeframes.

Topics will include how to:

• Identify structure on a higher frame and then use lower frames to pinpoint more precise entries
• Open-trade management in the context of a higher timeframe development
• Confirm and trigger more efficient entries into breakout set-ups, reversal opportunities, and pro-trend retracement situations

Corey will also share specific entries of trade logic building mostly from the intraday and daily timeframes that you can incorporate into the strategies you are using currently.

If you can’t attend the webinar today, you’ll be able to receive a recording shortly after the presentation by registering.

Thanks to everyone for making this possible and I’m looking forward to it!

Corey

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Both the Dow Jones and S&P 500 face price challenges at critical levels currently, particularly that of the rising 20d EMA.

Let’s take a look at these levels to watch and perhaps develop trades on any breakout from these levels.

First, the simple S&P 500 Daily Chart:

Removing all other factors, the Daily S&P 500 index faces a key “support test” at the confluence of the rising 20d EMA (1,297) and round-number 1,300 level.

If buyers step in here, we would be looking for a rally (and trend continuation) into 1,340 and any upward break above the 1,340/1,350 target allows for more room to run to the upside 1,375 Bull Market Recovery High last seen in May 2011.

Of course, should buyers fail to support the market at this logical retracement support level, downside targets such as 1,280, 1,260, and perhaps even 1,200 would be favored.

The Dow Jones Index shows a similar support level, but a major resistance level overhead:

The most important thing to me in the Dow Jones chart is not the rising 20d EMA support confluence, but the huge Wall of Overhead Resistance into the 12,800 level.

In other words, the Dow Jones Index is just a few points away from breaking to new bull market recovery highs above the May 2011 peak (12,876).

For traders, this is a key inflection where “Something’s Gotta Give,” and you can develop trades based on what happens (or more specifically, which price level fails/breaks).

From a logical standpoint, a breakthrough firmly above 12,900 will initially force short-sellers to buy-back their losing positions which may join with sidelined buyers who put on fresh new buy-positions or else add to existing bullish positions.

That is the logic of Positive Feedback Loops in price, particularly on firm breakthroughs above ‘obvious’ resistance levels.

Of course, a failure to break obvious resistance does not trigger a bullish feedback loop, and instead argues for price to fall lower to test previous support targets, which include 12,300, 12,200, and of course 12,000 in the Dow Jones.

As short-term (hopefully unbiased) traders, let’s watch these key support and resistance levels very  closely this week.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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One of the main activities that trip up traders, especially new traders, is the concept of continual price movement in one direction without meaningful pullbacks – also known as “powerful trends,” “creeper trends,” or “positive feedback loops.”

Let’s take a look at the current situation and put it in the context of prior S&P 500 day-over-day one directional movement.

First, the hourly S&P 500 pure price chart:

Let’s first define a “Positive Feedback Loop” and see how that concept explains these situations.

A Positive Feedback Loop occurs when one action leads to continual (or more) of the same action, such as higher prices resulting in higher prices, with these new higher prices resulting in even higher prices, and so on.

A real-world example includes situations of alarm or panic in a crowd, where a small number of people initially exhibit panic behavior (perhaps screaming or rushing for the exits) which leads to more people exhibiting panic behavior, which in turn leads to even more people in the crowd exhibiting panic behavior until everyone in the crowd is sufficiently panicked or else has escaped the building or situation.

By contrast, a Negative Feedback Loop – in the above example – would be when there is initial activity of panic but yet an authoritative announcement is made where people respond to the announcement and cease panicking.

Thus negative feedback loops occur when an initial situation is cross-checked by an opposite force that results in stability (or a return to normal) instead of increased activity that develops from un-checked activities in positive feedback loops.

In price, positive feedback loops develop from an initial price movement – often on a breakaway from a range or period of consolidation/contraction (negative feedback) – and then are sustained due to both sides (buyers and sellers) taking the same action for different reasons (one to make money; the other to stop losing money.

In the case of price moving higher in a positive feedback loop, an initial price breakout…

• causes those who are short to cover, which is a buying activity, which…
• triggers buy signals for bulls who either add to existing positions or else put on new positions, which…
• triggers those ’stubborn’ short-sellers (with wider stops) to buy-back to cover, which…
• excites more buyers to step in, again adding to positions or putting on new ones…

all of which leads to a perpetual upside trend or impulsive rally that develops a Positive Feedback Loop.

The feedback loop tends to end in one of two ways:

• All bulls who wanted to buy have all been filled (and are long)
• All bears who needed to buy-back to cover have exited their positions.

That’s an oversimplification, but it’s a good starting place to think about feedback loops in price.

Here are three prior Daily Chart examples of persistent Feedback Loops in the S&P 500:

I’m showing three smaller Positive Feedback Loop (trend) periods from the recent action.

Keep in mind that Positive Feedback Loops develop to the downside as well – the panic example above is a good illustration how some buyers initially rush for the exits which emboldens short sellers, and as price falls lower, more buyers rush for the exits – this impulse took the S&P 500 from 1,350 to 1,100 in about 12 days – where all but one of those days were down days.

October 2011 and January 2012 show us classic examples of Positive Feedback Loops in impulsive, one-directional day-over-day rallies.

Two other periods show similar characteristics, though on a larger scale:

During the second round of Quantitative Easing (announcement and official implementation), price developed an initial impulse beginning in September that ended in November, and a second sustained trend move developed from December.

This was a similar situation to what occurred during the first round of Quantitative Easing in 2009:

From the March 2009 low, price developed a sustained Positive Feedback Loop that propelled price from 666 to 950.

We can see a slight Negative Feedback Loop (consolidation) that developed in the middle of 2009 which gave-way also in August to another Positive Feedback Loop on the break to new recovery highs above 950 then 1,000.

Those who were short above these levels were forced to buy-back to cover, which emboldened more bulls to put on new positions or else add to existing positions in the context of a sustained, upward march higher.

One of the basic principles of Technical Analysis is that trends, once established, tend to have greater odds of continuing than of sudden reversals, which builds on the concept of Positive Feedback Loops.

Keep in mind that Feedback Loops occur on all timeframes as different traders interact with various trading tactics and strategies.

In general, it tips the odds to make it easier for traders to trade in the direction of feedback loops instead of against them.

Continue to study this topic for additional insights of how you can apply it to your own trading.

Here’s a few prior blog posts for more information on this concept and how to trade it:

• Quick Lesson from Intraday Creeper Trend Moves
• A Lesson from Creeper Intraday Trend Moves with Divergences
• July 11, 2011 “Making Sense of Current Range Behavior”
• Textbook Triangle Trade Example in Crude Oil (tactics)
• Higher Timeframes Lessons from the Breakout in Silver (Aug. 7, 2011)
• Popped Stops and History Repeating (during January 2011)
• Sep. 20, 2011 “SPX Breakout Trading Tips – Is this Really it?” (yes)
• Lessons from Failed Sell Signals and Popped Stops
• Opportunities from Popped Stops Intraday

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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