SP500 Teaches the Importance of Rising 20 day EMA in Trend

Apr 19, 2010: 2:40 PM CST

As I mentioned in this weekend’s update (S&P 500 at Support… For Now), we should be watching the 1,190 level which was a trendline support (which broke), but as an alternate important price to watch, we should expect at least a partial bounce (if not larger) as price tests the rising 20 day EMA at 1,180.

So far, that’s exactly what happened.

Let’s take a quick moment to see this great example of how intraday traders (particularly of index futures) could have benefited from expecting a potential ‘bounce’ or support zone on the lower timeframes by keeping in mind the EMA structure on the higher timeframe (in this case, the daily).

S&P 500 Daily Chart:

As intraday or even swing traders, you can always have the daily 20 and 50 EMA updated each morning and know that level while you trade, and should pay very close attention to what you’re seeing on your lower timeframe when price tests this level.

As it is a natural and often expected support area (not always an exact price, though today hit the exact EMA and bounced sharply), you should be monitoring for any sort of bullish reversal signal – or positive divergences in momentum or internals – as price tests the level.

For example, notice that 1,183 was the exact rising 20 EMA (it had been at the 1,180 level).

What did the chart look like when price tested that level intraday?

I’m showing the standard 3/10 Momentum Oscillator here.

Notice that as we spiked (actually fell sharply) down to test 1,183 (the 20 EMA), we did so on a noticeable and obvious positive momentum divergence (green arrow).  That’s a bullish non-confirmation of lower prices.

There wasn’t a nice reversal candle – or at least a common one like a nice little doji or bullish engulfing or spinning top or hammer (at least on the 15-min frame… the 5-min chart sported a nice spinning top candle for the absolute low).

While there’s other methods you can focus on (for example, the positive divergence in market internals), I wanted to highlight these two confluences specifically and how they worked together to find the low of the day (a nice exit point if short and an aggressive buy if you’re trying to call bottoms).

They were the 20 EMA on the daily chart at 1,183 when combined with a positive momentum divergence.

At a minimum, that’s a “take profits” signal for shorts to see how far a bounce might go, or even a potential “go long” signal for aggressive traders willing to take a tight stop under 1,180 (or corresponding value on the SPY or @ES futures) if support did not hold.

For now, watch the confluence price, Fibonacci, and EMA resistance – highlighted – at 1,197 and 1,200 (for good measure) to expect continuation to the upside… or if that’s all the bulls can muster.

These are the sort of everyday examples/lessons I describe for members each day in the Idealized Trades Reports – part educational/instructional; part ‘levels and structure to watch’ for tomorrow.

The archives (dating back to April 2009) have become a reference for learning type of day structure and specific trade set-ups (viewing multiple examples).

Corey Rosenbloom, CMT
Afraid to Trade.com

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

3 Comments

3 Responses to “SP500 Teaches the Importance of Rising 20 day EMA in Trend”

  1. Midday Check on Bullish Market Internals April 20 | Afraid to Trade.com Blog Says:

    […] Yesterday’s price low  bounced off the 20 day EMA on a positive momentum and ‘internals’ divergence as I mentioned in yesterday’s update “SP500 Teaches the Importance of the 20 day EMA.” […]

  2. Bouncing Yet Again off that 20 day EMA | Afraid to Trade.com Blog Says:

    […] Again off that 20 day EMA Apr 23, 2010: 9:50 AM CST In a prior post from April 19th entitled “The S&P 500 Teaches the Importance of the Rising 20 day EMA,” I highlighted how the intraday low was the exact value of the rising 20 day EMA… and […]

  3. Market Shows the Benefit of Moving Average Levels | Afraid to Trade.com Blog Says:

    […] “SP500 Teaches Importance of Rising 20d EMA” […]