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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