New SP500 Highs Forecast by Fifth Sprung Bear Trap

Nov 9, 2009: 11:28 AM CST

Well, folks, the bulls have done it again – it looks like buyers have sprung an amazing fifth Bear Trap in the last few months that – if recent history repeats – will lead to another new high in the S&P 500.

Let’s take a look at the prior four traps that led to new highs:

What I’m showing is the daily S&P 500 from early June, 2009.

The highlighted regions represent the unyielding price rise (almost literally straight up for 8 or 9 days at a time) that came directly after a classic breaking of support via the 20 (or 50) period exponential moving average.

Generally, a break in a moving average triggers sell orders in the expectation that support is broken.

Stop-losses are placed above the entry (usually back above the average) and any sort of upward movement triggers a vicious cycle where stop-losses become “buy to cover” orders, further driving prices higher with buying pressure.

A Bear Trap is thus sprung when a valid or classic sell signal is generated and then price moves upwards into the ‘pocket’ of stop-losses from the short-sellers.  To be a bear trap, a valid sell signal has to occur.

1.  The Head and Shoulders Pattern neckline was broken, in addition to price breaking under the 200 day SMA, generating a very powerful sell signal… that led to an even MORE powerful rally when the signal failed.

2.  A break of the 20 day EMA after a strong selling bar (down-day) triggered entry… and as price moved higher back above the 20 EMA, a flood of stop-losses helped drive the index higher four days in a row.

3.  Using the exact same logic as before, but this time the “Melt-Up” avalanche yielded almost 9 up-days in a row with only a one-day doji pause.

4.  This time price broke solidly on another strong selling bar under the 20 EMA, but technically supported off the confluence of the 50 day EMA and the lower Bollinger.  Still, the rise back above the 20 EMA coincided with another (almost) 9 day price rise with only a minor pause.

5.  It looks like it’s happening again, in that a break of both the 20 and 50 day EMA triggered in more short-sellers… and now we’re having their stop-losses taken out yet again which – if history since July is any guide – will lead to a new price high in the S&P 500.

Take a moment to read my prior post entitled, “A Look at the 12 Most Recent Failed Sell-Signals in the S&P 500” for additional, detailed insights.

There was a similar post I wrote entitled “Recent Failed Sell Signals and Short Squeezes in the SPY” which is a prior discussion on this concept.

Also, this post is almost identical to my ‘prediction post’ of the same logic that forecast the most recent price highs – “If History Repeats, Will it Mean New Highs for S&P 500?

Be aware of the current “character” or behavior of the market and realize the nuances like this that can help prevent losses or translate into gains.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

15 Comments

15 Responses to “New SP500 Highs Forecast by Fifth Sprung Bear Trap”

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  2. sandew Says:

    One difference I see this time is that unlike the past where the doji were formed after the the index on all 4 occasions had moved upwards from the lower end to the top end of the Bollinger Band; this time however, the doji is formed much earlier just in the middle of the BB.

  3. sandew Says:

    One difference I see this time is that unlike the past where the doji were formed after the the index on all 4 occasions had moved upwards from the lower end to the top end of the Bollinger Band; this time however, the doji is formed much earlier just in the middle of the BB.

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