Midweek US Index Update and Reference Levels

May 5, 2010: 3:24 PM CST

We’ve had a volatile start to the first week in May!

Let’s take a quick moment to assess the damage on the three main US Equity Index charts for reference levels to watch going forward.

First, the Dow Jones:

Traders use the daily 20 and 50 moving averages as reference levels – I prefer to use the exponential averages for references, though others prefer simple averages.

For now, the Dow Jones index briefly nipped under the 50 day EMA at 10,857 before rising back above this critical level, closing just above its support line.

The lower Bollinger Band rests at 10,875.

If buyers cannot support prices here, then odds overwhelmingly favor a test of the January high at the 10,700 level to determine if this is a simple retracement… or something worse (reversal).

Next, the NASDAQ:

We’ll use the similar structures to watch in the other indexes.

The NASDAQ actually fell and closed under its 50 day EMA which currently rests at 2,240.

Price sits just above the key ’round number’ support zone of 2,400, though any further selling push under 2,400 likely takes us back to the prior January highs at 2,325.

Finally, the S&P 500:

I tend to focus most of my analysis on the S&P 500, so it’s good to see how the other indexes compare.

Many traders can recall key levels to watch on the S&P 500 without looking at a chart, but it’s still helpful to know why they are key levels to watch.

For now, it’s 1,170 (50 day EMA) which – like the NASDAQ – sellers broke today and the index closed under that level.

As long as we’re under 1,170, the next level of support is 1,150.

Look closely at each index to see the lengthy negative momentum (3/10 Oscillator) divergence that preceded the absolute top in each index.

Negative divergences themselves are not sell signals, but they do strongly warn that “all is not right” with further new highs in the future… and many times the ‘snap-back retracement’ from a lengthy negative divergence can be harsh – as we are seeing now.

I often call the sharp downward resolution in price after a lengthy divergence a “Divergence Unwinding.”

Keep watching all of these reference levels on the charts for clues as to what larger traders are thinking and acting once a key level is tested successfully… or broken.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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3 Comments

3 Responses to “Midweek US Index Update and Reference Levels”

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  2. Here We Go – It is Make or Break at SP500 1150 | Afraid to Trade.com Blog Says:

    […] Levels to Watch on Major US Indexes […]

  3. TheYenGuy Says:

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    http://my.opera.com/theyenguy/blog/show.dml/110