With this morning’s powerful break to new 2009 highs above price resistance, let’s look at the comparative price structures in the Dow Jones, NASDAQ, and S&P 500 Indexes year to date (as of mid-day July 23).
Dow Jones Index:
The Dow Jones is the only major US Market Index that has not made a fresh high for 2009, but that’s only in semantics, as the January 2009 high was 9088 which – as of this writing – is about 60 points away from breaking to new highs.
It’s important to note that the index has risen above the June and February highs on the most powerful, single swing of the year (rising almost 9 days in a row now).
The ‘failed’ Head and Shoulders pattern has lead to a more powerful than expected breakout in the opposite direction, as well as short sellers covering their positions all the way up – which is also the case in the S&P 500.
The Technology-heavy NASDAQ Composite Index is the strongest of the three, having risen 20% since 2009 began – that is an accomplishment traders who follow only the Dow or S&P 500 are missing.
The NASDAQ is often known as a market leader, so strength in the NASDAQ is generally good for the overall markets. The NASDAQ is now set for a 10-day winning streak! Who saw that feat coming!
S&P 500 Index:
While most eyes are focused on the S&P 500, the S&P broke above its resistance that I and probably most people expected to hold which was around 954 from the June and January 2009 highs.
Today’s development reminds me of a couple of things.
First, like Mike Bellafiore of SMB Capital described in his recent interview, it’s best to think of the market and set-up trades in terms of “If/Then” statements. For me, I expected resistance to hold but noted “IF the market breaks this resistance, it will defy a large number of people’s expectations and – as the ‘last line in the sand’ for sellers – will THEN likely result in a large, sudden rally as stop-losses from hardened bears are taken out, creating upside pressure.”
It is not helpful to have a dogmatic view that the market *has* to go in one direction over the other – pay attention to sentiment and know when a large group of traders are likely to be caught off guard when the market defies expectation. You’ll probably take a stop-loss but if you’ve framed the scenario properly, you can profit from the losing side being squeezed – sometimes these unexpected moves lead to the largest profits.
Another similar scenario played out earlier this month, when so many traders expected the Head & Shoulders pattern to break sharply to the downside. I highlighted how sentiment was over-bearish and that just a small ’spark’ higher would trigger a strong rally (which has been stronger than even I expected).
The “If/Then” was the same: “IF the market breaks sharply above 875 and holds support, THEN the sellers will be thrown off balance and a large short-covering rally (with new buyers coming in) will commence.”
Finally, it shows us that we need to use good money management and adherence to stop-losses in the event we’re wrong – there’s absolutely no point in fighting the tape (price movement) all the way up just because we have fundamental, technical, or quantative reasons for the market to rise or fall. A major key to trading success long-term is being able to discern low-risk, high probability trading opportunities, take the trades, and take smaller losses than your profitable trades.
It’s about edge, and the combination of the “Accuracy Edge” with the “Monetary Edge.”
The S&P 500 will most likely try to target the coveted 1,000 level which could serve as a ‘magnet trade.’
I’m reminded of what Brian Shannon of AlphaTrends is famous for saying: “It’s all about price!”.
Check out my May update post on “Competing Elliott Wave Counts in the S&P 500” for a broader perspective, in which all counts targeted the 1,000 level as a likely outcome, which we’re experiencing now.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade