A Tuesday Look at the SP500 Index

Jan 13, 2009: 8:39 PM CST

It’s not quite mid-week but the S&P 500 (and other US Equity Market Indexes) have broken significant moving average support and are hoving near a critical floor that – if broken – would set-up an immediate test of the November lows.  Let’s look.

S&P 500 Daily Chart:

Before getting into ‘prediction,’ let’s see how we got here.

First and foremost, the price remains in a strong and often confirmed downtrend on the daily chart as confirmed by lower highs and lower lows and also the moving averages being in the “Most Bearish Orientation Possible.”  Do not let this pass by your attention – it is very basic.

Price made a lower swing high at 1,000 in November and then made a new swing low beneath 750 (breaking the 2002 bear market low) also in November – price has rallied between those levels in a corrective consolidation pattern ever since.

Officially, we’ve formed a ‘rectangle’ or parallel consolidation pattern, but there’s something insidious which might just preclude further downside.  At the start of 2009, price broke above key resistance from the 50 day EMA, a development which hasn’t occurred (with any follow-through) since May 2008. It could be that this ‘poke’ above the average will fail to give follow-through as well… and if so, then we’ll have a significant Bull Trap on our hands and any downside tip in price here would send them covering a good deal of their shorts (seeing as that price was not ‘supposed’ to break the 50 and 20 confluence EMA support).

The S&P 500 now remains tightly coiled and balanced between 850 and 950.  If sellers can push the index beneath 850 (8,300 on the Dow Jones), then it could force an immediate and swift test of the November lows as there would be nothing left to support price until it hit that level… possibly breaking it (but we’ll discuss that when we get the test).

For now, I’d recommend day-trading inside this range until the range breaks (no one can be certain in which direction it will break, though odds certainly favor a downside break) and then play for a range-expansion swing move once we get a break out of the current rectangle which – literally – could come any day now.

Until then, hold tight and try not to be too aggressive if you can help it.

Corey Rosenbloom
Afraid to Trade.com

11 Comments

11 Responses to “A Tuesday Look at the SP500 Index”

  1. Joe Says:

    I tried the short play twice today on the Dow, but got out quickly when the index didn’t break. Bulls and Bears are still fighting it out most of today.

    Good post. Thanks Corey.

  2. NotAfraidofTrend Says:

    Corey, the market internals are not as weak as they were in Sept, Oct and Nov.. Breadth is good. And, as of market close today, 54% of stocks are in an “uptrend”, i.e. with the DI+ above DI-, and 58% are in a “downtrend”. It is a very delicate balance.

    Incidetnally, the 850-950 range is a wide range of 100 S&P points or approx. 1000 Dow Points, BUT insidious and volatile enough to entrap both bulls and bears and hit stops with regularity.

    Personally, my theory is that the final break will take place in the direction that causes maximum grief to the most. In other words, the direction of the break will be determined by the ratio of the trapped bulls versus trapped bears, while the jumps up & down, or saunters around, in the S&P 850-950 range.

  3. NotAfraidofTrend Says:

    Correction to 2: … while the market jumps up & down ….

  4. NotAfraidofTrend Says:

    Correction to posting 2: … 54% are in “uptrend” and “46%” are in “downtrend” ..

  5. Trader Mom Says:

    Trading between 850 and 950 is exactly what I have been doing lately. I do not see any signs of a bull run from here. A major breakdown also might meet a lot of resistance.

  6. Corey Rosenbloom Says:

    Joe,

    That’s the sense I’m getting too – this is an epic battle right now and it might pay to stand aside and wait for a clear winner to emerge.

    Until then, it’s chop-city.

  7. Corey Rosenbloom Says:

    NotAfraid,

    It’s good (from a bullish view) to see these divergences but I’m waiting for the price follow-through to show up.

    Balance is a good word. Struggle. Battle. Uncertain outcome. Precipice.

    You’re thinking is along with mine – a lot of people are going to be caught flat-footed – perhaps both sides (in terms of the bull trap I pointed out… and what if we get a bear trap (down move that does NOT test the November lows) then a sharp reversal up to break the November highs.

    That’s the definition of maximum pain!

  8. Corey Rosenbloom Says:

    TM,

    We don’t get conditions like this often. The edge has indeed fallen to those trading the intraday time frames over the last week or more. Most others have been chopped to bits.

    The only support I see if we break 850 is the 750 low – I’m not seeing much Fibonacci there or any moving averages below price. A test of 750 seems certain if we break below 850… but we could find support at 850 to continue the vicious rectangle.

  9. Trader Mom Says:

    Corey. you are right. The worst that a trader can have is whipsaw. That is why I trade very volatile stocks. If you take a look at all the stocks I traded. They move up and down like monkeys. I just love volatility

  10. Corey Rosenbloom Says:

    You and I are just the opposite but that’s great! I tend to shy away from volatility because I prefer stable retracement moves, but I’ve made more money quicker in volatile markets than stable markets. I strive for the stable, rising equity curve even though I deploy day-trading tactics because I guess that’s all my heart can handle! I did the small-cap volatility momentum strategies when I got started but I sure couldn’t do that now! Things just move too fast for comfort now it seems.

  11. Trader Mom Says:

    I do not trade small cap. I trade large-cap once in a while. But what I trade most is mid-cap. I do trade very liquid stocks since I will need to scale to bigger positions when my system is stable.