What Happens When Key Resistance is Broken

Aug 19, 2009: 1:14 PM CST

I’ve been discussing this concept behind the scenes but wanted to share a little insight with this morning’s example of broken resistance leading to a break-out (along with a great triangle example!).  Let’s take a look:

For the background perspective on why this breakout is important and somewhat unexpected, please see my post “SPY Rounded Reversal into Fibonacci Resistance” from last night.

We did get the down-move as expected from my bias in last night’s post, but the only way to profit from it would have been to take a ’short-on-close’ or short sale ’swing’ position from my mid-day post yesterday calling a ‘top’ and rounded reversal.

This gives us a good example of walking forward in real-time as to how price and expectation play out.

Both posts called for a down-swing to challenge a minimum of the $98.20 level, from which the rounded reversal began, if not a larger target as a best case scenario.

We did get a gap-down to this level (meaning the “Rounded Reversal” was not as smooth as I would have liked, but rather ‘violent’ in its descent to the target) and an immediate gap-fill up (I still love the gap fills) and then a pause at the overhead expected resistance levels.

The key to trading – as Mark Douglas reminds us – is flexibility along with an open mind, complete with “If/Then” statements and ‘fluid’ expectations.

Meaning, we should have expected the $99.40 resistance to hold, but been aware that quite a few eyes were likely watching this level and that there would have been a nice ‘pocket’ of stop-losses – ours included – above that level at different increments.

So the bias should have been “I expect price to hold resistance at the $99.40 SPY level, but in the event that price rises beyond that, many traders will be thrown off balance and will be stopped out, creating a possible powerful short-term momentum move up that I’d like to participate or ’scalp’ as well.”

In this sense, if resistance holds, we make a nice profit short, and if resistance fails AND traders are stunned and forced to cover, we’ll take a stop-loss but consider flipping long in anticipation of a momentum move up.

The key to this logic is realizing that the thrust up was caused only partly by new longs flooding into the market, but also partly due to short-sellers – as frustrated as they are – covering what many felt was a sure-fire position.

We see this exact same “If/Then” logic and large thrust bars occurring after the famous July “Head and Shoulders” pattern (so many people were watching) trigger and then immediately fail.

In my experience – and in so many others’ I’m sure – trading is not about knowing the future, but anticipating two or three scenarios, picking one as dominant, and then knowing where each thought process is wrong and then anticipating the repercussions and how large groups of traders are likely to react.

What you’ll find is that some of the best moves occur when the opposite happens of what is most logically anticipated, almost beyond doubt.  The market just works that way sometimes.

Usually you’ll get a predictable ’scalp profit’ when an expected resistance or support level is broken, but only if you’re aware of it.

It’s about maintaining an ‘accuracy edge’ with a ‘monetary edge’ and profiting consistently (not wild account fluctuations up or down) over time.

Finally, it’s about truly believing – as Mark Douglas explained that we should believe – that “anything can happen in the market!”

Corey Rosenbloom, CMT
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Download Prechter’s July Elliott Wave Theorist Free

Aug 19, 2009: 12:24 PM CST

Robert Prechter and the team at Elliott Wave International are releasing July’s 10-page Elliott Wave Theorist (market outlook and prediction service) for free and I wanted to provide the link for you.

Mr. Prechter recently received wide acclaim for going on CNBC and releasing similar public reports and interviews when he proclaimed “Cover Your Shorts” shortly after the March 2009 lows in anticipation of a large rally that he said would take the S&P 500 up to the 1,000 level – he was correct in that call.

You may have heard Mr. Prechter back on CNBC sharing his analysis that the corrective rally is close to an end, or may already have ended, so he is warning caution ahead for the markets after such a strong rally off the lows which he considers a “Bear Market Rally.”

You may download last month’s Theorist either via the promotional image above, or the prior text link above.

From EWI’s website, here is the introductory text to the article:

“One of Bob Prechter’s most recent Elliott Wave Theorist is now online, free!

In this issue, Bob gives a warning he’s never had to include in 30 years of publishing – namely, that the doors to financial safety are closing all over the world.

There are but a few opportunities left and little time to take them. Even as this happens, the terrible irony is that so many people believe the conventional wisdom, which claims “the worst is over.”

Mr. Prechter has been known to make bold predictions, and I have always been impressed with his knowledge and grasp of markets, particularly in regards to the Socio-economic influences that others rarely discuss.

I’m personally not as bearish as Mr. Prechter, but it helps to keep an open mind and learn from the perspective and insights of such a long-term market veteran.  In addition, word of this article is spreading over the internet, so it can be helpful to go to the source and read Prechter’s direct commentary.

My thanks to Mr. Prechter and staff for making this report public for all of us to study.

Corey Rosenbloom, CMT Continue Reading…

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Rounded Reversal into Exact Fibonacci Confluence on SPY

Aug 18, 2009: 5:08 PM CST

Today’s Rounded Reversal is still the dominant pattern, but what’s more interesting is that price retraced up into a confluence Fibonacci area.  Let’s take a quick look at this and what might be in store.

Drawing two Fibonacci grids from the $98.11 low of August 17th to the $100.81 swing high on August 14th, and then back to the swing high near $101.60 from last week yields the following two Fibonacci price grids.

The 50% and the 38.2% Fibonacci retracement levels align almost exactly at the $99.47 level, which was just shy of today’s intraday high – this level will be absolutely critical to watch in tomorrow’s trading session.

A possible 5-wave Elliott fractal to the downside may be completing, with the 5th wave just around the corner, if not forming already.

To make matters worse for the bulls, a ’rounded reversal’ arc (which I pointed out in real-time today) has formed into this level.

SPY Rounded Arc Intraday:

Typically, a ’rounded arc’ is a gentle reversal pattern that highlights the transfer from demand to supply in an orderly fashion.

The Three-Push negative momentum divergence, along with the negative TICK divergence (shown in today’s earlier post) paint a rather bearish picture.

I describe these structures, patterns, and levels in much more detail in today’s Idealized Trades report (please visit our premium content section for subscription information).

There’s certainly no guarantee price will inflect downward off these levels, but the odds certainly favor a continuation downward move… or at least that reward remains to the downside while reward remains to the downside from a strictly technical (chart) perspective.

Be safe out there and please check back for more updates.

Corey Rosenbloom, CMT
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Three Push and TICK Divergences Signal Likely Intraday Top

Aug 18, 2009: 1:55 PM CST

I wanted to give a quick mid-day update on the current SPY structure (that of a possible rounded reversal that has formed a lengthy momentum and internal divergence).  Let’s take a look:

First, let me say this is an afternoon update and there is still over an hour until the close, but for what we’re seeing right now, it would appear odds favor the intraday high has been made… or at least that a significant new high is a lower probability outcome.

I’ll go through this all in full detail in today’s “Idealized Trades” Summary report, but for now, it might be a good idea for those who can pick up on it quickly to take this pattern into account and act accordingly.

There’s a possible 5-wave Elliott fractal structure that seems to have completed which formed a “Three Push” price pattern which is accompanied by a classic “Three Push” negative momentum divergence in the 3/10 Oscillator.

What’s more important than that is that we have formed TICK divergences off the morning TICK high of 1,200 – as price has crested to higher highs, the absolute TICK value has not reached those levels.

Plus, we’re picking up new TICK lows on the day which could be a form of the classic “Wyckoff Sign of Weakness.”

The play would be to put a stop a decent distance above the recent $99.40 high (or equivalent if trading the @ES futures or any leveraged ETF) and play for a possible “Rounded Reversal” structure to develop (particularly if we break the 20 and then 50 EMAs), which could be dominant into the close, barring some unforeseen price surge right into the close.

This would not guarantee a successful short-sale trade (price could break these developments and continue rising), but in the event price falls, the larger reward would be worth the smaller risk.  If you’re long, it might be a good idea to liquidate here at a minimum if you didn’t feel up for a short-sale.

Let’s see what happens and let’s try to learn from the resolution when the day is complete.

Corey Rosenbloom, CMT
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Quick Current Weekly Glance at Dow, NAS, and SP500

Aug 17, 2009: 12:56 PM CST

With the broad markets at critical potential turning points, let’s take a quick fly-by view of the weekly structure (showing the entirety of the Bear Market so far) of the Dow Jones, NASDAQ, and S&P 500.

Dow Jones Index Weekly:

The Dow Jones is inflecting downwards (retracing) off the critical expected resistance zone of the 9,450 level, which reflects the 38.2% Fibonacci level of the ‘entire’ Bear Market as shown.

Price is also at the upper Bollinger Band, signaling an overbought condition.

A clean and crystal clear negative volume divergence has set-in as price stair-stepped its way higher through overhead resistance levels since bottoming in March 2009.

It would be a major accomplishment for bulls to break above the 9,500 resistance level, so until that happens, keep your eyes set on downside targets, including the 50 and 20 week EMAs as shown above, if not the 8,000 level for a retest of prior price support… if not beyond.

NASDAQ:

The NASDAQ Index – as is usually the case – has shown relative strength on the recent rally off the March lows, rallying 60% off the 1,300 level.

The NASDAQ broke through the 38.2% Fibonacci level (the grid above is inverted), but is failing (struggling) just beneath the 50% Fibonacci level at 2,070.

Along with the Dow, price is (was) at the upper level of the weekly Bollinger Bands, and two dojis formed on the last two candles (weekly bars) prior to this morning’s downside opening.

If the technical picture above holds out (meaning bulls don’t pick up the pace yet again here), we should expect a minimum move down to test the EMA confluence support at 1,800.

Finally, the S&P 500:

Like the Dow Jones, the S&P 500 is failing to overcome critical resistance at the 1,014 level which reflects the 38.2% Fibonacci zone of the entire Bear Market so far.

Along with being at the upper boundary of the Bollinger Bands, price formed a doji candle last week and now price is inflected down as anticipated.  Keep your eye on lower support levels via weekly EMAs, and target a potential retracement to the 900 level should price continue its retracement.

Though generally volume has declined during the rally off the March lows, the S&P 500 actually saw a relative ‘pick-up’ in volume in July as shown above.  That’s an interesting development.

Watch overhead resistance levels in the market and keep these structures in mind when setting up lower timeframe trades.  Manage risk, and try not to get overly bearish – bulls have shown amazing resiliency, so keep that in mind when analyzing charts from a technical purism approach.

Remember we have the “Weekly Intermarket Technical Report” available for subscription to keep you ahead of the curve when it comes to short and intermediate term trading opportunities and levels to watch in key related markets, including the S&P 500 in much more detail than described above.

Corey Rosenbloom, CMT Continue Reading…

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