A View of the SP500 Structure to Start the Week

Feb 9, 2009: 9:18 AM CST

We may see a major resolution of the tight range in the S&P 500 this week.  Let’s define that range and see what the current S&P 500 Structure is telling us.

S&P 500 Daily Chart:

SP500 Daily

I could have drawn numerous trendlines and channels to show the price consolidation but decided to let the price speak for itself and note the ever-decreasing (consolidating/contracting) range on the daily chart.  The dominant short-term pattern from January 20 to February 9 is that of a tight contracting triangle with the 50 day EMA serving as the upper boundary and the red upward sloping line serving as the lower boundary.

One can pull back to a larger pattern to see a broader consolidating pattern or triangle compressing price down to its current level as well.  A more liberal interpretation allows us to see a potential inverse Head and Shoulders bottom pattern forming – I’ll try to discuss that more clearly if it develops (the current action would be the final right shoulder).

There’s clear resistance about the 900 level and clear support at the 800 level – both have been tested many times.  The last time price broke above 900 (early January) was only a false break and classified as a “Bull Trap.”  The resistance came in at the 38.2% Fibonacci retracement off the September highs to the November lows.  The corresponding Fibonacci grid is drawn which still shows this lvel – 944 – as resistance.

Support is clearly at the 800 level from multiple tests and from ’round number support’ but you see also that the sellers attempted to force us down through this level and failed also in November, putting in an intermediate term bottom.  Conveniently, the range to watch is 800 – 900.

The momentum oscillator is telling us nothing other than we’re range-bound and consolidating, and gives no clues about the future at the moment – most oscillators will likely be ‘saying’ the same thing.

It’s probably best to wait for a break of either of these levels before taking action, and I’m thinking we’ll get resolution one way or the other this week.

Corey Rosenbloom
Afraid to Trade.com

Keep up-to-date with the Afraid to Trade Feed.
Follow Afraid to Trade on Twitter:  http://twitter.com/afraidtotrade

4 Comments

4 Responses to “A View of the SP500 Structure to Start the Week”

  1. Andrew Stanton Says:

    Draw one trend line between the November high and the January high (points A & C)then draw another trend line between the November low and the January low (points B & D). If correct, wave E should end soon. Just don’t ask which wave four this triangle is!

  2. Corey Rosenbloom Says:

    That’s the problem! Not only do we have the key trendlines you mentioned, but I’m seeing probably six distinct possibilities in terms of interpretation based on where you draw trendlines, if you truncate points or not, etc.

    It’s craziness – that’s the clearest word for it. The structure will become clearer soon but it’s always most difficult before the break.

  3. NotAfraidofTrend Says:

    Corey, is it not true that a symmetrical triangle, representing consolidation, would normally break in the direction of the trend?

    And the direction of the trend is down.

    We need patience to let the consolidating wave 4 complete. The breakdown WILL occur.

    Meanwhile, if we are a “long-term” player, i.e. short and hold, we should not really care what the market does, until it breaks down.

  4. Corey Rosenbloom Says:

    NotAfraid,

    The classic interpretation of triangles is just that – that they break in the direction of the trend. I’m more comfortable joining price action when a break occurs and throwing the prediction (which way?!) out the window so I don’t get biased and miss vital information. Besides, the edge in a triangle comes from the price expansion out of the triangle rather than predicting in which direction it will go. See them as consolidation patterns and expect expansion.

    Regarding long-term, right, the expectation is down so you should be – on balance – shorting the market. But be open to new information and ready to exit if unfavorable (bullish) price action occurs and take a stop if need be. There’s no reason to stay with a losing trade – especially in this volatile market – as it surges against you to the upside IF we get the unexpected in the form of an upside break.