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