Here We Go at 1110 – Trap, Reversal, or Breakout

Technical analysis is extremely helpful for finding major inflection points – prices – in the markets that are known reference points between bulls (buyers) and bears (sellers).

It can’t tell you exactly way price will break – thus it’s not a crystal ball – but it can help you assess the “Bull/Bear Balance” or “Supply/Demand Relationship” when a market reaches a critical reference level that everyone is watching and waiting to put on a new position, or rush to take off an old position that now has hit a stop-loss.

That’s what’s about to happen right now – this instant.  Let’s see:

(Click for full-size image)

This is an update from yesterday’s “Market Internals at June 14 Highs” post.

Because things are happening so quickly, I’ll keep this post brief and hit the highlights.

There are likely a LOT of bearish (short-sellers) stop losses on the other side of index value 1,110 – as it marks the top of a known trading range, the 200 day SMA, and the 38.2% Fibonacci retracement.

In fact, let’s see those:

200 day SMA:  1,108
38.2% Fibonacci Retracement up:  1,109
Prior price resistance:  1,105
“Round number”:  1,110

Major inflection points – like this – in the markets are like soldiers lined up on a battlefield.  We don’t know which army will cross the line, but once a line is crossed, the battle dynamics change.

Bears – who prefer tight stops – will rush to cover (buy back their short-sold positions) on a break above 1,110 when the market starts to tick to 1,111, 1,112, 1,113 as they feel the pain of monetary loss.

Bulls, on the other hand, see this is a potentially early place to get long with a low-risk, tight stop (under 1,110) to try to play not only a range breakout, but a break above a known confluence resistance level.

Of course, bears are putting on short-positions expecting price to hold under 1,110.

If buyers push the bears to cover, we will likely see a “Popped Stops” play.  That’s a positive feedback loop where bulls rush to buy the breakout and bears rush to protect losses by ‘buying back’ their shares – a classic short-squeeze of sorts.

The alternative is that buyers fail to overcome sellers here, and price remains within the established trading range and heads back to 1,040… and bears would defend their ‘turf’ on the battlefield.

The other – less pleasant for everyone – outcome would be a “Bull Trap,” wherein bears would cover above 1,110, bulls would buy a breakout, and then price would sink right back into the trading range.

That’s why a lot of traders like to see price clearly breakout and stay out – close one or two days – rather than rush to buy an index tick of 1,111, 1,112, etc.

Whatever your play, watch closely what happens here.  Very closely.  Keep everything in terms of “Risk/Reward”/probabilities rather than absolute certainties.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade