Eerie Similarities in Recent SPY Trading Range

Dec 10, 2009: 1:41 PM CST

We’ve all been discussing and trading within the recent “Trading Range” between $111.50 and $109.00 on the SPY (1,110 and 1,085 on the S&P 500 index) but I wanted to take a closer look to show some of the repetitive patterns within the range itself.

Starting with November 16th, the SPY tested the $111.50 level, then paused, and fell sharply with a gap down to challenge the $109.00 level.

PRice then formed a positive momentum divergence and then gapped strongly upwards through the 20 and 50 EMA to test once again the $111.50 area… paused… and then gapped sharply lower (this was the “Dubai World” event) yet supported once again on the $109.00 level.

Another ‘hook’ or semi-positive divergence formed on November 30th before price shot once again higher, gapping through the 20 and 50 day EMA at the $110.00 level and – no surprise – found resistance at the $111.50 area.

This time, buyers … or short-sellers stopping out (short squeezes or “Popped Stops”)… drove the ETF to new highs on three “Bull Traps” that triggered stop-losses of the bears but was not met with new buying of the bulls.

This set the stage – and the odds – to favor a test once again of the $109.00 level as an expected target… and price did not disappoint, gapping down through the flat moving averages just like in the past.

Here we are again with another positive momentum divergence at the $109.00 level and odds favoring a test back up to $111.50 as price – yet again – gapped through the $110.00 area (the moving averages).

I know a lot of traders are frustrated with the current trading range, but the market is showing a keen pattern here that is not going unnoticed.

History repeats – it just doesn’t repeat next week!  But that is the case here in the current trading range.

This range won’t last forever, and the expectation for any trading range is for a breakout to produce a sustained trend move – though you cannot predict in which direction price will break.

The Range Expansion and Contraction Principle of price teaches us to expect a range expansion move next and the boundaries are drawn:

Long above $111.50 (actually $112.00) which would break above the “Bear Market” 50% Fibonacci Resistance at 1,121 (S&P 500 index) or

Short under $109.00 for a play down to $105.00 at least if not to prior support levels.

Until then, stand aside or consider taking advantage of the repeating patterns in the recent trading range.

Corey Rosenbloom, CMT

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13 Comments

13 Responses to “Eerie Similarities in Recent SPY Trading Range”

  1. blues Says:

    the problem with playing breaking down on the range is that will it be a true breakdown or simply another bear trap just like the bull trap on top?

  2. Corey Rosenbloom, CMT Says:

    Such is the trade profile of breakout strategies – they tend to be lower accuracy (lower win rate) but with the wins, they are much, much larger than the losses.

    One can always wait for a threshold – like a close two days outside the range – before entering.

  3. zxj24 Says:

    Hi Corey, thanks for latest post. Let me ask you something. It is a silly question. your divergence indicator is your graph is it a MACD line or something else? can you share the setting for that indicator?

    Thanks

  4. zxj24 Says:

    Hi Corey

    Thanks for the latest graph, Let me ask you something. Is the divergence indicator you are using in that graph is a MACD or something else? what setting are you used for that indicator??

    thanks

  5. Corey Rosenbloom, CMT Says:

    No prob! Thanks for the question.

    It's a standard MACD under settings 3, 10, 16 in StockCharts, though it's customized in TradeStation (uses SMAs instead of EMAs like MACD does).

    Info here:
    http://blog.afraidtotrade.com/how-do-i-create-t

  6. zxj24 Says:

    great! thanks again

  7. Jeff Moodie Says:

    I am taking advantage of the holidays mixed in with the trading range and set up an iron condor (options for those who are not familiar with the term)to bracket this range, selling premiums seems to be a good plan when the market is so undecided…expiry of December end of month.

    Jeff.

  8. * Fibozachi * Says:

    Corey ! You SoB … ya beat us to the punch on this one, lol. Nice work, yet again !! Thanks for sharing it with us. Mr. Market is CLEARLY trying to tell us something about this level and has simply REFUSES to touch that minor Gann angle line at 1101 / 1102. Great stuff, Corey! Thanks again.

  9. Indianalar Says:

    The shadows know.

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