Market Cracks Overhead Resistance

Jan 2, 2009: 1:52 PM CST

How’s this for a headline:  All Four Major US Equity Indexes have now Broken Above Key Resistance via their 50 day EMAs… at least intraday.  Let’s take a quick look and then wait for a fuller assessment after today’s close.

S&P 500 Daily Chart:

Again, fuller analysis will come after the close but you need to be aware of this development as it’s occurring.

Price has pierced the flattening 50 day EMA on an intraday basis which could lead to a major move in the market if shorts are forced to cover soon.

The 20 day EMA is now rising and has curved to the upside.  The momentum oscillator has been forming a positive momentum divergence underneath price since the November lows, which really is only good for a stronger than normal expected retracement, but often divergences can precede pure price reversals.

The new highs – as many are saying – are occurring on lower volume, but remember we’re still slightly in “holiday volume.”

Keep in mind there’s a so-called “January Effect” which tends to give a boost to the first few days of the year (and last few days of the old year) in addition to a potentially late “Santa Claus Rally.”

What’s going to be important to watch is if this run above resistance is only good to take out the short-sellers’s stop-loss orders (in which price could reverse sharply back down) or if there’s some real strength behind this rally, particularly if we can make a new momentum high (above indicator value 25).

Bulls are ‘squeezing’ the Bears at this point – let’s see how much force they have and watch what happens next very closely.

Corey Rosenbloom
Afraid to Trade.com

6 Comments

6 Responses to “Market Cracks Overhead Resistance”

  1. planetelex Says:

    Hi Corey,

    I’d be very interested to hear you thoughts on the treasury bubble. I’ve been watching things closely looking for to go long TBT or to buy TLT puts at some point.

    With TLT filling the gap today though and with a good chance existing that this is merely a correction of an overbought condition TLT could be a good short term long. Then again there are probably better trades out there.

    http://screencast.com/t/hrSNqsPFc

  2. toad37 Says:

    Corey,
    Have you been introduced to the website http://www.retracementlevels.com/ ? Everyone on The Slope of Hope with Tim Knight has been amazed by the accuracy of this guys retracement tool. Tim himself uses it daily to help with his trading, especially for the SPX.

  3. Corey Rosenbloom Says:

    Planet,

    My initial thought is that I’m surprised it hasn’t happened before November. I expected treaasuries to surge pretty much all year but it wasn’t until the end that they ‘blew up’ in euphoric (panic) bubble form, which actually is a bad sign for continued upside.

    From your chart, it looks like a classic price exhaustion pattern complete with ‘blow-off top’ gap (actually ‘exhaustion’ gap) forming.

    Right now I have us at the rising 20 day EMA on TLT so a short would be in good risk/reward should we break that level soon.

    If we do get a good oversold rally in the equity markets, people are going to rush out of bonds and into the market thinking the bottom has arrived. I heard it said again on the evening news tonight – they used the word “Bottom.” People will be driven by that sentiment and the bond market is likely to suffer because of it.

  4. Corey Rosenbloom Says:

    Toad,

    I haven’t but thank you for providing the link. I’ll check it out – it looks promising. I have great respect for Knight so if he’s using it with results, it must be good.

  5. toad37 Says:

    Corey,

    It’s a free service and you can sign up to have them email you the daily long and short reverse levels. If you have any questions let me know.

  6. bond trader Says:

    Corey:
    1- Re the bond bubble and TBT; yes we have an exhaustion gap but (according to bloomberg data), the volume sees a spike, and exhustion gaps tend to have declining volume rather than spikes.

    2- Re bonds themselves, still no proper count there, although a possible truncated 5th of 5th of 3rd will have us in the middle of a big wave 4

    3- i remember your discussion post of the two possible counts for the equity markets- if i remember correctly, u thought we were in the fourth of the 3rd (scenario 2). if so shouldnt this rally end arounf 945 +/- ?

    Thanks!