SP500 Consolidates in Tight Range

May 24, 2009: 12:59 PM CST

After an amazing run-up off the early March lows, the S&P 500 is finally pausing to consolidate some of those gains.  Let’s take a look at the current triangle consolidation forming and note key levels of support and resistance going forward.

As I mentioned recently, the S&P 500 has (at least) three levels of confluence resistance at the 940 level via the falling 200 day SMA, top of the Bollinger Band, and the January highs.  These levels are still holding a lid on price as bulls bump against this area.

However, there now has developed a level of key support about the 880 level, coming from the February highs, May lows (resistance once broken becomes support) and the 20 day EMA.

There is also a rising trendline that can be drawn under the steady uptrend since March, but if you look very closely, price has just nipped beneath this established trendline in what might be an early sign of weakness – 45 degree angular trendlines are never eternally sustainable, especially on broad indexes.

A doji has formed on the support of the 20 EMA at the 880 level.

Look closely also to see that – currently – a descending triangle may be forming on the daily chart – if so, this has bearish implications.  Notice the contraction in price swings that will soon lead to an apex and breakout of the minor converging trendlines.

As it stands now, 940 will be powerful resistance to break and if price fails to hold 880 as support, then it will set-up a sudden “magnet trade” to test the rising 50 day EMA at 860 and if that is broken, then we will have to look to Fibonacci retracements (drawn from the March low to the May high) for additional levels of possible support.

As I suggested previously, it’s probably better for most people to wait until we break above 940 or beneath 860 or 880 instead of trying to play Price Ping-Pong between these key levels.

Corey Rosenbloom, CMT
Afraid to Trade.com

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Comments
  • Pietro
    Hi Corey,

    I write you from Rome, I've been read you since a year and congratulations for the nice blog. I just want you to clarify me a question regarding your famous Oscillator 3/10:

    In "My Strategies" section you say...Momentum Divergences are invalidated in rangebound, consolading markets, only look for divergences in the context of a mature TREND....and on the other hand you always remind forget it and don't have into account on trend days.

    Doesn't seem a uncongruence?

    Best Regards

  • Hey Pietro,

    Glad having you from Rome! My best friend's father was born in Rome and they visit every few years - I'd love to go myself!

    The 3/10 Oscillator and the Momentum concepts fail at price extremes. In a low-volatility environment, New Momentum Highs and Lows don't mean very much - you're better off using oscillators like RSI and Stochastics to fade extremes of the range.

    At volatility extremes - blow-off tops and climaxes - you also can't trust the 3/10 (or other momentum oscillators) because they will give you false New Momentum Highs/Lows right at a reversal point.

    On the same token that you can't trust it in low volatility environments, you can't trust it in the low volatility environments that characterize Trend Days and 'oozing/creeping' Trends because it will give false divergences just like the flat price action (though in this case you can't trust RSI or Stochastic because they will give false OB/OS signals).

    This explains why you can't just take an indicator and make a million dollars. You must take into consideration the volatility, trend, price environment and know which indicators perform best, which fail in certain environments, etc.

    If it were so easy, everyone would be doing it!
  • Jason
    Hi Corey,

    Looking at your preferred Elliot wave count, we would expect a 5 wave swing up from (B) to complete wave corrective wave (C) and primary wave 4. It seems like we had a 5 wave swing that ended May 8th - but this was below (A) and you mentioned (C) would have to make a high above (A) (maybe 1000 level).

    Could the May 8th high possibly be (A) with the March low marking the completion of primary wave 3 (your more bearish count)? Or by Elliot rules is it OK for (C) not to make a new high above (A) as in the case of a triangle? (This assumes May 8th marked the completeion of either (A) or (C) - but perhaps that is not the case?)

    Thanks for all the excellent info you provide here.

    JC
  • Jason,

    Good thoughts. The only problem I have with the "Most Bullish" and "Most Bearish" count is that they both assume the March 9th lows came off the end of a 5-wave affair from January to March 2009 and anyone can clearly see that it counts out best as a 3-wave move.

    This leads us to conclude that it is a corrective wave and we ask "of what?" and then we see that perhaps Wave 3 bottomed in November with an ABC X ABC double zig-zag sort of structure or A, regular everyday 3-wave B (zig-zag), and then now we're in a 5-wave C.

    Now, if B goes beneath A, then we would expect we're experiencing an Expanded Flat in which we would expect C to go beyond the price high of A. It could be a type of Irregular Flat in which we get B beyond A but C truncating below A which is a rare pattern but yes certainly could happen (anything can happen - Elliott is still one tool of many after all).

    I think the important thing is to gather the weight of the evidence from sentiment, indicators, price principles, higher timeframes, etc and add two or three Elliott Counts in as possibilities - I do not encourage making solitary decisions based on Elliott Wave.
  • Corey, please see the following link with a negative divergence between Prices and Momentum.

    Here is your own chart modified ---> http://i40.tinypic.com/jp7pz8....

    Regards,

    Gustavo - Phantom
  • Gustavo,

    Thank you for sharing! I drew the negative volume divergence but didn't discuss it and also should have noted the negative momentum divergence as well - both of which hint that the market will break to the downside - but I wanted to take more of a neutral stance because there have been plenty of negative divergences on the 60min chart that have failed to materialize in a downmove, and run-away trend moves often generate false divergences like Trend Days do.

    The buyers have shown their resiliency and it's probably a better bet to wait until they are officially defeated (breaking below the 50 EMA at 860) or officially victorious (breaking above 940) to take a position - it will be safer that way.
  • Yes. You are right and I full agree.
    It is the best way not to influence investors.
    The old Wait&See position is more valid than ever!
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