SP500 Breakout: Popped Stops or Something Else

Mar 2, 2010: 10:21 AM CST

It’s common to ask the question when price breaks a key resistance level, “Is this a real breakout that will last, or is this just a short-squeeze situation that won’t?”

That’s the operative question now – let’s take a look at the price breakout in the S&P 500 and try to make a determination with the information we have so far.

The 1,111 area was key resistance (a key inflection point), being the 61.8% Retracement, a descending trendline, and prior price resistance (late February high of 1,111).

As traders, it’s best not to get biased in either opinion (“Resistance will hold.”  or “Resistance will break.”) and take the Mark Douglas approach of “Price has entered a key inflection point that has to break one way or the other, and enter once we start to see a movement and place a stop on the other side” (Trading in the Zone) and especially take advantage of any unexpected breaks by playing intraday.

I describe this in a few prior posts:

1,100 Resistance Level to Hold or Break,” and also:

Lessons From Failed Signals and Popped Stops

What Happens when Resistance is Broken?”

Opportunities from Popped Stops Intraday

Once 1,100 did break Monday (with a gap), we had the classic “Popped Stops” buy play which was a benefit to intraday traders looking to play long off the short-squeeze that came from resistance being broken.

Now that the resistance is broken, we want to know if this is just a “quick blip” (a one or two day ‘short-squeeze’ rally, where the buying is mostly fueled by short-sellers covering) or something else, where buyers are stepping up and driving price higher, creating a true breakout.

Right now, with the information given, it “feels like” a popped-stops rally,” and that’s evidenced by the choppy intraday action yesterday, divergences in market internals (see yesterday’s post “A Mid-Day Check on Divergent Market Internals“), declining volume (usually you want to see increased volume on a key break such as this), etc.

However, take a look at the highlighted regions I’ve drawn on the chart, which represent similar “Popped Stops” rallies that continued to drive price higher on lower volume all the way up (particularly October, November, and early January).

What’s a trader to do?

Stick to your intraday trading in such situations where price has been known to rally without stopping while forming all sorts of bearish non-confirmations.

Look to short weakness on any confirmed trendline or moving average break (a divergence is not enough evidence to get short – confirm entry with some sort of price breakdown).

Be on the lookout for any bullish signs such as a rise in volume, strengthening in internals, etc.

Until then, trade cautiously with the conflicting information out there.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

3 Comments

3 Responses to “SP500 Breakout: Popped Stops or Something Else”

  1. Dan de Man Says:

    Hey Corey, Thanks for the article and agree 100% that one has to trade this ride up cautiously. But, I just wanted to add that if the US dollar rolls over we may see a real bull run and more crushing of bears.

    Cheers,
    Dan

  2. TheYenGuy Says:

    You ask: What’s a trader to do?

    I notice you relate: “The resistance is broken, we want to know if this is just a “quick blip” (a one or two day ’short-squeeze’ rally, where the buying is mostly fueled by short-sellers covering) or something else?”

    The something else is purchasing of growth stocks: Housing, XHB, Retail, XRT, Biotechnology, PBE, Intenet HHH, Consumer Discretionary, IYC, which today all showed topping out chart patterns.

    And the Russell 2000, IWM, made a reach to 64.75, just missing its January 19 high of 64.85; traders have jumped into moving the Russell 2000 like they use to, except this time without of the financial sector upon which it has been so dependent; talk about the short selling opportunity of a lifetime this is it!

    The strength, outside of the Russell 2000, came from some techincal factors such as buyouts and revenue projections from companies; but the driving force was last week's Ben Bernanke's testimony that interest rates needed to stay low.

    Today is really a pop; it is to be sold, and as you say, “Be on the lookout for any bullish signs such as a rise in volume, strengthening in internals, etc.”

    As seen from the following chart of the Proshares bear market ETF's it's an excellent time to go short the market with REW, TWM, EEV http://tinyurl.com/yz22dj6

    But, I believe that one may not have access to one's funds at the brokerage or in money market accounts, in a coming liquidity crisis, so I encourage investment in gold, with the purchase of British Sovereign gold coins, a BullionVault.com account and the gold ETF, GLD, in a trust account not a brokerage account.

    Buy gold? You bet …. it's as I wrote today in my blog article: Gold Breaks Out … Growth Stocks Show Topping Out Patterns On Light Volume
    http://tinyurl.com/ykckrdw

  3. TheYenGuy Says:

    You ask: What’s a trader to do?

    I notice you relate: “The resistance is broken, we want to know if this is just a “quick blip” (a one or two day ’short-squeeze’ rally, where the buying is mostly fueled by short-sellers covering) or something else?”

    The something else is purchasing of growth stocks: Housing, XHB, Retail, XRT, Biotechnology, PBE, Intenet HHH, Consumer Discretionary, IYC, which today all showed topping out chart patterns.

    And the Russell 2000, IWM, made a reach to 64.75, just missing its January 19 high of 64.85; traders have jumped into moving the Russell 2000 like they use to, except this time without of the financial sector upon which it has been so dependent; talk about the short selling opportunity of a lifetime this is it!

    The strength, outside of the Russell 2000, came from some techincal factors such as buyouts and revenue projections from companies; but the driving force was last week's Ben Bernanke's testimony that interest rates needed to stay low.

    Today is really a pop; it is to be sold, and as you say, “Be on the lookout for any bullish signs such as a rise in volume, strengthening in internals, etc.”

    As seen from the following chart of the Proshares bear market ETF's it's an excellent time to go short the market with REW, TWM, EEV http://tinyurl.com/yz22dj6

    But, I believe that one may not have access to one's funds at the brokerage or in money market accounts, in a coming liquidity crisis, so I encourage investment in gold, with the purchase of British Sovereign gold coins, a BullionVault.com account and the gold ETF, GLD, in a trust account not a brokerage account.

    Buy gold? You bet …. it's as I wrote today in my blog article: Gold Breaks Out … Growth Stocks Show Topping Out Patterns On Light Volume
    http://tinyurl.com/ykckrdw