Let’s take a quick look at one of the major reasons price has entered a tight consolidation range by scaling back our perspective and looking at the ‘entirety’ of the Bear Markets in the S&P 500, Dow Jones, and NASDAQ to find that markets are testing critical resistance levels here that – when resolved either with a breakout above or retracement under – should give us a clue as to what targets to expect going forward into the new year.

First, the critical 1,121 level on the S&P 500:

S&P 500 Weekly:

The 50% “Bear Market” Fibonacci Retracemet rests at 1,121, and notice the tight weekly consolidation candles that have formed as price has challenged the underside of this absolutely critical level.

This is the “Line in the Sand” between bull and bear, and many traders have their eye on this level in eager anticipation of a resolution.

An upside break from here would likely cause the next short-term target to be 1,200 at least, though if price falls here and challenges lower levels, look for 1,020 or even 1,000 to be the next short-term target.

NASDAQ Weekly:

The NASDAQ has already broken above its 50% Retracement and is sitting just beneath the 61.8% Fibonacci Retracement at 2,233.

There is a confluence also with the 200 week simple moving average – also known as THE Line in the Sand between Bull and Bear Markets.

The 200 week SMA rests currently at 2,209.

Also – for reference – the upper weekly Bollinger Band resides at 2,240.

A break to the upside above 2,250 could trigger a move to 2,500, but it would be a major turning point in the market and would be very difficult to argue bearishly as long as price was above 2,250.

Dow Jones Weekly:

The Dow Jones is battling against critical resistance at 10,500, though price has just slightly slipped above the key 50% Fibonacci Retracement at 10,334.

See my prior post: “Interesting Confluence to Watch at 10,500 on the Dow Jones” for more insight into why this level would be critical to watch and significant if broken to the upside.

Conclusion:

Markets are driven by supply and demand – and not indicators, but indicators can be helpful in assessing the calculus (balance) of supply and demand, as well as levels that – if broken – would change the game.

Bears (short sellers) will have stop-losses above these levels mentioned above, so any move into these levels, breaking resistance, will likely trigger the “Popped Stops” phenomenon which creates further upward momentum.

If bulls (buyers) continue stepping up and buying at these broken resistance levels, then that would mark a significant turning point in market structure.

Otherwise, if bulls (buyers) fail to step up, and price remains at these levels, then the weight of those taking short-sale or “exit with profit” sales at these levels could force the market lower.

As an aside, we see persistent negative volume and momentum divergences which tends to argue for a downside resolution, but that by no means is guaranteed.

Be aleart, ready to act, and keep these reference levels front and center in the next few days and weeks and into 2010.

Corey Rosenbloom, CMT
Afraid to Trade.com

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