SP500 Tempts Traders with 1300 Bull Bear Battle

Jan 27, 2011: 3:28 PM CST

If you’re an active trader, no doubt you’re on the edge of your trading chair trying to figure out if the S&P 500 is going to breakout through the key 1,300 level today, tomorrow, or alternately retrace deeper from here.

Let’s take a quick “Step-Inside” analysis of the intraday price and compare it to signals from key Market Internals and set-up a potential game-plan scenario depending on who wins the “Battle for 1,300.”

5-min SP500 Chart:

What we’re seeing is the Pure Price S&P 500 5-min chart with the 1,300 emphasized as the level we’re all watching with bated breath.

Beneath that is your standard Breadth – NYSE advancing issues minus declining issues.

Finally, we have a custom NYSE TICK indicator I created which scales the TICK at zero so that we can hyper-focus on TICK highs – the TICK represents the number of stocks ‘ticking’ up at a given moment minus those ‘ticking’ down.

Before we get down to business, I always like to show you educational examples in the charts, and we have a teaching moment on January 25th wherein the market pushed to a new intraday swing low at 1,282 but it did so with a POSITIVE divergence in breadth.

That means that as the actual S&P 500 traded to a new intraday low at that point, FEWER stocks were trading down than were at the prior low – big divergences like this often precede short-term reversals which you can trade when price breaks a trendline, as happened in this example.

Notice that the TICK rocketed to new chart highs at the close of the session, serving as a CONFIRMATION of the up-move and thus signaling odds were good for higher prices yet to come – namely into the 1,300 target.

That’s what happened and we’re there, playing the Bull/Bear or Demand/Supply “will it hold or break” game at this all-important level.

It’s important not just because it’s a round number, but as I highlighted in a previous post, it’s important because it’s the swing high resistance point from August 2008.

This is often the case when price pushes up into a key reference level – price will probe the level, come down a bit, probe/test again, come down again, scratching gently or aggressively against the main level.

The level isn’t magic – it’s in part self-imposed by media attention and technical analysis teachings in general that traders use in making buy/sell/hedge decisions on the short, intermediate, and even long-term charts.

In the event that price does break through 1,300, then we immediately trigger two bullish (potential) forces:

1.  Bears/Short-Sellers who played a low-risk opportunity (shorting into known resistance) who are now forced to BUY shares/contracts to COVER their losses on the breakthrough of resistance

2.  Bulls/Buyers/Investors who are either adding to existing long positions, or coming in off the sidelines, wishing to put money to work in a rising market that cleared a key technical level

These are the two factors that create and sustain “Positive Feedback Loops,” a topic I’ve discussed frequently in blog posts and presentations.

Does that mean a break of 1,300 immediately surges us up non-stop?  No – a minor breach of a few points could be a trap so that’s a contingency to watch.

Otherwise, a failure for buyers to overcome sellers (demand to overcome supply) at resistance thus locks in the level and sends the market lower to test lower levels – a la Market Profile (markets that fail to auction higher must then auction lower).

That doesn’t mean the bull trend reverses – to get that, we’d need breakdowns through rising price trendlines, swing lows, and daily and weekly moving averages which are situated at lower levels (we’ll cross that bridge if we come to it).

On the bullish side, a firm, official breakthrough here officially sets the next intermediate SP500 target to 1,450 (the prior swing high from May 2008).

Whatever happens, this is a KEY inflection point across all markets where an intermediate term resolution is likely to occur.

Watch and trade closely without bias (if possible!).

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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4 Comments

4 Responses to “SP500 Tempts Traders with 1300 Bull Bear Battle”

  1. Tweets that mention SP500 Tempts Traders with 1300 Bull Bear Battle | Afraid to Trade.com Blog -- Topsy.com Says:

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  2. Terlyn12001 Says:

    Looks like an ending diagonal forming on the daily chart; also with DIA, which has 2 dojis.

  3. Corey Rosenbloom, CMT Says:

    True, but it's still an unknown outcome as supply and demand interact. If the market does trade higher despite the divergences, dojis, and other sort of bearish factors, it will pop-out the stops of those who are aggressively short here, turning the bears into buyers (stopping out). That's why inflection points are so important – they can lead to game-changers that last months.

  4. Bullish Divergences and Developing Intraday Structure in US Dollar UUP | Afraid to Trade.com Blog Says:

    […] posted Thursday on the clear divergences in the S&P 500, and then followed up Friday – after a 20 point move down – regarding “Why […]