If History Repeats, Will it mean New High for SP500?

Oct 6, 2009: 4:59 PM CST

Let’s take an interesting walk down recent memory lane – specifically, the last few months since late May 2009.  Why might that be useful?  Because four times over the last four months, price looked like it was going to begin a deep retracement… and then suddenly and sharply began rising, taking all short-sellers’ stop losses with them.  Is history about to repeat itself again?

Let’s walk back to the end of May 2009 when a negative momentum and volume divergence foretold of a pullback in the market.  The market did retrace back to the 20 day EMA at 880, broke intraday beneath it… and then surged to a fresh new 2009 price high.

Multiple dojis formed, all looked bleak for buyers, volume was diverging and now we had formed the dreaded “Three Push” negative momentum divergence in price into all these dojis.  I know of many swing traders who got aggressively short at these levels and traded as the market went lower.

Then the “Head and Shoulders” pattern formed, broke the neckline, and triggered a massive wave of short-selling into the “tri-star” doji pattern that began July’s lows.

Once again, as price started to rise, short sellers covered anxiously, and price surged very rapidly off the 880 “line in the sand.”  Bears were devastated; bulls were overjoyed.

Thinking the “third time is the charm,” bears again began to pile into the sell signal generated from yet another negative momentum and volume divergence into the 1,000 resistance level.  Price began its downward move, cracked under the 20 EMA yet again… and then just like the last time, surged higher, taking more stop-losses with them.

This time price formed even more dojis and an even deeper momentum and volume divergence – at the upper Bollinger Band, no less.  We had a strong gap down, a fall of over 1% that also cracked under the 20 EMA, and a whole new wave of sellers began putting on swing trading positions short.

And, like clockwork, buyers (or whomever) invalidated that sell signal as well, this time resulting in an even more powerful, almost nine day rally straight up without stopping – taking more battered bears with them in the process.

Now we form more dojis again at the upper Bollinger Band, have some tough selling (declining) days in a row, and we think “this is the high” and it very well may be.

But the question you need to ask is the following:  “Is this the “real deal” selling … or is it just one more Bear Trap that will result in a surge to new 2009 highs, driven in part by the stop-losses of the bears?”

Remember, it’s not about indicators – it’s about supply and demand.  Buyers – wherever they’re coming from (yes, short-sellers covering in ‘short squeezes’ contributes to the demand side of the equation) are dominant and if history is any guide, it looks like we’re likely to have higher prices no matter how strange or illogical it may seem.

Join Corey and many others at the Las Vegas Trader’s Expo from November 18-21 (details at Expo website – attendance is free).

Corey Rosenbloom, CMT
Afraid to Trade.com

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

12 Comments

12 Responses to “If History Repeats, Will it mean New High for SP500?”

  1. Bob Says:

    A bounce here at these levels is OK, and so is a pull back. Doesn't really matter, does it? Trade the market…

    Last quarter, going into earnings the markets had pulled back and sat at the brink testing key support; earnings proved better than expected and the markets rallied strongly.

    This quarters earnings are starting today. With the market having rallied strongly going into earnings it isn't as favorable a set up for extending a rally… has this rally been a “pump and dump” set up?

  2. Dan de Man Says:

    Looks like we may be able to do it if the market eats up Alcoa?

  3. Dan de Man Says:

    So here we are again. If you weren't long before the 10 day ema it's too late. Only price action can tell us our next move.

  4. Dan de Man Says:

    So here we are again. If you weren't long before the 10 day ema it's too late. Only price action can tell us our next move.

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