Overhead Cradle Resistance for the SP 500 Feb 3

Feb 3, 2010: 12:40 PM CST

I wanted to highlight a critical overhead resistance level – what I call the “Cradle Crossover” – that is occurring now in the S&P 500 Index.  A resolution of this structure would certainly give us clues as to what to expect going forward.

Let’s see the SP 500 Daily “Cradle”:

A “Cradle Trade” as I define it occurs when price is in an uptrend and then sharply breaks down through the rising 20 and 50 period exponential moving averages.  Check.

Then, if price remains under these averages for a few days (daily chart), then the shorter average – the 20 period – will cross “bearishly” under the intermediate period – 50.  That’s one point away here.

Finally, price will rally upwards into the “confluence crossover” (I call it the “Cradle”) zone where the 20 and 50 EMAs cross – and in this case, we see that crossover forming at the 1,107 area.

The main idea is that this zone forms an overhead wall of resistance and gives clues about the future when we see a resolution at this area.

This is a trade set-up, but if price ‘breaks’ the cradle, then we would expect to see a run to new highs in another of a long series of failed sell signals (see my prior post “The 12 Failed Sell Signals on the S&P 500“).

However, the general expectation – when price rallies into a key resistance level –  is that the resistance level will hold, creating an inflection down which can lead to a true trend reversal.

No one knows the future with 100% certainty, so that’s why we use reference levels as guideposts to assess supply and demand (buying and selling conviction/pressure).

For now, we need to watch the 1,110 level with great interest, as a key point that would mark a likely turning point in the structure – bullish (‘bear trap’) if broken; but strong bearish bias if resistance holds and particularly if price swings down from here to form a new swing low under 1,070.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

14 Comments

14 Responses to “Overhead Cradle Resistance for the SP 500 Feb 3”

  1. Matt Says:

    Love your work and I've been following for awhile. I'm curious if you've ever rigorously back-tested the cradle signal and the results?

  2. Corey Rosenbloom, CMT Says:

    Matt,

    Not with TradeStation but anecdotally/experiencially. That's something I'll be doing in the near future though.

  3. thelereport Says:

    The 50-EMA of the S&P 500 is now rolls over. Remember, a rising EMA often acts as support while a falling EMA often acts as resistance. It appears the S&P 500 is stalling at resistance here. Personally, I'm shorting the market as long it stays below that level – 1,110-1,115.

  4. Corey Rosenbloom, CMT Says:

    That's probably a very good idea! We had broad technical damage to key stocks during the January sell-off and for now, this has the flavor of a 'counter-retracement' up instead of an impulse … so far.

  5. Dan de Man Says:

    Thanks Corey. I would have to take an educated guess that the bulls push to the 20 ma, 1120 just to frustrate some bears and then fail. The MACD histogram is still rising and trading against that wave could be short term painful. I just don't think that the bulls are just going to give up that easily.

  6. skogie1 Says:

    Looking at the simple moving averages, didn't we experience this in mid-July? The S&P was at about 925 then…. Just an FYI to all those looking to short based upon this setup.

  7. Corey Rosenbloom, CMT Says:

    That's right! That was also a failed triggered head and shoulders set-up that trounced the bears, resulting in a massive short-squeeze.

  8. bhups Says:

    Hi corey Rosenbloom
    Can you Please update Nifty Elliot wave.
    Currently major Resistance and support seen around 4980 and 4750 level respectively

  9. Diggy - Upgradereality.com Says:

    Hey Corey!
    I think the news today and tomorrow are going to steer this thing in a direction. While it is possible that we get another day or two of rally (personally I think up to around 1120) I am more leaning in favor of further downside.

    Lets see how this plays out!
    Cheers!
    Diggy

  10. Diggy - Upgradereality.com Says:

    Further downside we got indeed, wowee a drop of 30 points 🙂

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  12. bhups Says:

    Hi corey Rosenbloom Nifty broke and gave close below the 4750 level,i.e.38.2% retracement level as well as the gann fan line support of 50%. Nifty has form the BEAR FLAG pattern. I think breakout is likely to continue toward 4640 level i.e. around 200 SMA. I want to know the curretn Elliot Wave for Nifty. Regards Bhups

  13. bhups Says:

    Hi corey Rosenbloom Nifty broke and gave close below the 4750 level,i.e.38.2% retracement level as well as the gann fan line support of 50%. Nifty has form the BEAR FLAG pattern. I think breakout is likely to continue toward 4640 level i.e. around 200 SMA. I want to know the curretn Elliot Wave for Nifty. Regards Bhups

  14. A Quick Quad-Market Assessment of the Selloff Thursday | Penny Stock Trading System Blog Says:

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