We all were watching the 1,040 level on the S&P 500, and when it broke, traders reacted as expected:  Bears pounced and Bulls ran for the exits.

If you’re asking yourself why we bounced so hard this morning, then you didn’t see the ‘hidden’ defense price via a large-scale Fibonacci Confluence.

There’s never a guarantee any Fibonacci level will hold when price tests it, but for now, this level held so we need to focus on it as the key level to watch.

A quick glance at the chart shows two very important Fibonacci Retracemnents converge at the 1,010 level.  That’s where we bounced strongly off today’s lows, and where the bulls will stage their last chance of a comeback after losing the “battle” of 1,040.

The Blue lines represent the large-scale Fibonacci Retracement Grid from the 2007 top to the 2009 bottom, with the market peaking in April 2010 8 points shy of the 61.8% retracement at 1,228.

You would reference these levels on the way UP, but they still exist as price trails to the downside.

As price trails lower, you need to draw a new Fibonacci reference grid, starting with the March 2009 and stretch to the April 2010 high – this is the Green Grid on the chart.

We can see that the 38.2% retracement rests at 1,008, and today’s low so far was 1,010.

This very important short-term level converges with the 38.2% – strangely enough – retracement of the entire bear market grid at 1,014.

Bulls defended this level in today’s trading action, so it has now become a known reference level of potential support.

Just like 1,040, if bulls cannot hold support here at the lesser known 1,010 level, then we will look lower to target the 50% line at 943 or eventually the 61.8% line at 876 which happens to correspond with the neckline of the Head and Shoulders (failed) pattern from June.

Strange how that happens.

Corey Rosenbloom, CMT
Afraid to Trade.com

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