Market Shattering Resistance triggers Popped Stops

Nov 4, 2010: 10:36 AM CST

Going up into this week, I’ve been describing two scenarios – one of which was the expectation for a “Popped Stops” bust-out if the S&P 500 rose above the 1,200 (targeting 1,220) and then of course higher beyond that on a second break above 1,220.

With this morning’s upside action breaking 1,200, the immediate and expected “skyrocket” move through “Open Air” to the 1,220 level has occurred, and it’s a great lesson in “IF/THEN” statements and expectations, as seen below:

See my prior post on simplicity:

“The Simple but Critical Level to Watch on SPX”

The weekly level was 1,200 (simple as that), and with the upside break, we then turn to the 2010 high at 1,219 (1,220 for ’round number’) for the next immediate target.

And in one morning, we’re there, as seen above.

I highlighted another point on the chart with the consolidation at resistance at 1,150 to show a similar instance of “Popped Stops.”

How does Popped Stops work, you ask?

That’s what I’ll be discussing soon on November 18th at the Traders Expo Las Vegas.  The session will be a free, live webinar which you can attend via the MoneyShow:

“The Popped Stops Play:  How to Profit when Good Trades Go Bad.”

The live webinar will begin 11:00am EST/10:00am CST (8:00am PST).

I’ll be describing this example during the presentation.

The logic is simple:

When conditions look too good to be true – namely, put on a short-sell position into known resistance – a very strange thing happens.  All the traders who are shorting INTO resistance must place a stop-loss order to exit the position in the event resistance breaks (like this morning).

And while you can’t predict whether resistance will hold or fail, what you CAN predict – and thus trade/profit from – is that IF that resistance fails, price will then enter the “Pocket” of stop-losses above resistance.

And if that happens, you’ll see rallies – which you can easily anticipate – bust out like this morning.  This is the “Popped Stops” play and it happens more frequently than you might imagine.

By the way, the same logic is true with an update to Caterpillar at resistance at $80, as I’ve been showing.  We’re seeing sellers capitulate (buy-back to cover) and sidelined buyers rushing in to buy shares on the respective break highs in Caterpillar.

Back to the S&P 500, we’re up at our expected target at 1,220.  If we break above 1,220, expect a second round of Popped Stops to rocket the market even higher.

Be safe!  And always keep an open mind.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

3 Comments

3 Responses to “Market Shattering Resistance triggers Popped Stops”

  1. David O. Says:

    Bless Your Bunions!…Corey.

    Thanx again.

    Later.

  2. Guest Says:

    I told you negative divergence doesn't matter when it pops. You were like repeatedly calling for negative divergence in multiple posts.

    Now, watch for a bull trap!

  3. Corey Rosenbloom, CMT Says:

    That's the point! And no, I was calling for an explosive move up on a break of 1,200 despite divergences – hence my recent “Keep it simple” post. The divergences are a chart fact, yes, but price overrules any indicator.

    It's the Fed and the printing press, but those who are short above 1,200 – and if we breach up into 1,220 – will likely be covering which adds bullish fuel. True – risk now is for a bull trap.