SP500 Market Structure Moving from Stability to Instability

Jan 24, 2013: 6:18 PM CST

I wanted to show a quick chart that tracks the progression in terms of S&P 500 Market Structure moving from clear to unclear – from stability to instability.

Let’s see what I mean starting with the 30-min intraday structure of the S&P 500:

Market Structure give us a quick glance of the progression and strength of a trend in motion and it helps us put our intraday trades in the context of pro-trend or counter-trend opportunities.

The simplest way to assess structure is to connect the progression of swing highs and lows and identify whether we’re seeing progressively higher highs and higher lows (uptrend) or lower lows and lower highs (downtrend).

Trends reverse when the structure of highs and lows change (meaning there is a higher high and a higher low that develop in the context of an ongoing downtrend).

Definitions aside, what I want to highlight is the progression from stability (shown from October to December 2012) to instability (January 2013).

I don’t mean to refer to instability as a negative term, but only to highlight the important need for caution with short-term trading tactics.

Unstable conditions develop from positive feedback loops, wherein one side of the market dominates the other.

In this case with the breakout to new highs above 1,474, a clear (and expected) positive feedback loop has developed wherein buyers are entering the market (buying because of the breakout or else adding to existing positions) and sellers are exiting the market (buying-back to cover losses on the short side).

You may also refer to this as a “Short Squeeze.”

The price has taken the form of a “Rising Arc Trendline Pattern” and you can see the arc-movement that has developed as a result of the feedback loop in motion:

The main idea is to be vigilant and more active on the short-term frame as long as this ‘breakout outcome’ and feedback loop continues.

Focus on the lower rising “Arc” trendline for any breakdown under the structure which could quickly correct/retrace the grossly overextended price action.

Risk increases on both sides of the market during unstable environments (feedback loops) because buyers don’t really have clean/simple retracements into the rapidly moving market while bears – if they do find an entry – are often forced to buy-back to cover losses soon after a short-position is established (which merely helps fuel the trend).

For reference, the same logic applies to a market breaking down and engaging in a positive feedback loop of selling pressure.

Keep focused on real-time activity and be safe.  It’s often much easier to trade in a stable environment with clean ’swings’ in both directions but that’s not what’s going on at the moment.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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  • Just a GREAT post! It is a timely reminder for all that we are in a different market for the time being and things that work during 'stability' will not necessarily work now...

    We have seen this unstable 'up moves' every year since 2009 and we have seen unstable down moves every year since 2008 EXCEPT for 2012!

    When will it end? No one should guess right now.... it does not make sense - it could have ended yesterday.... it could end in April.... or May....

    THANKS for this post - it reminded me that for my approach, the sidelines is the best place right now.


  • Alex

    Hi Correy, as one of many anonymous traders that read your posts, I just wanted to say that you have the highest quality input in terms of market structure, internals, etc...really exemplary work. Thank you for your thoughtful inputs.

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