SPX Tests Critical Daily Resistance Cluster July 13

Jul 13, 2010: 9:33 AM CST

Rallying off positive earnings announcements, the S&P 500 hit the overhead confluence resistance price target this morning at 1,090, and the question now is “Will the resistance hold?” and “If not, where is the next pocket of overhead resistance to target?”

Good questions!  Let’s see the answers:

As I’ve been showing to Idealized Trades members and in last week’s post “Overhead SP500 Levels to Watch,” the first overhead target was 1,090 which was hit this morning.

The cluster comes from the 38.2% Fibonacci Retracement at 1,090 and the falling 50 day EMA at 1,093.

So far so good – but will it hold?

Yesterday showed a massive market internal divergence, but today Breadth increased to provide support for the rally, while TICK and VOLD stayed muted in a non-confirmation.

Combine that with the clear negative volume divergence (above) and you create a picture where the odds seem to favor resistance holding at 1,090.

You generally want to see internals, momentum, and volume rally as much as possible as price charges towards an overhead confluence resistance level if you expect the level to break, not hold.

Remember, the market is a game of probabilities, not certainties, so we can only look at the underlying structure to assess the probabilities.  Price is governed by supply and demand – not indicators.

Demand (buying) also comes from short-sellers who cover once a resistance area is broken – this is what creates “Positive Feedback Loops” (bulls buying the break and bears buying to cover shorts).

So, as of the morning session on Tuesday, odds seem to favor 1,090 holding – at least short-term – as resistance.

But what if it doesn’t?

Then we look to the second overhead resistance cluster and expect a “Popped Stops” impulse to send the index there.

It’s at the 1,110 level – simple.

The following converge there:

50% Fibonacci:  1,115
200 day SMA:  1,111
Prior Resistance:  1,110-1,120

So while we could expect a pop to this level if buyers push the index through 1,090, it would take a great deal of sustained/continued buying pressure to push through 1,110.

And that’s exactly why a move above 1,120/1,130 will be a short-term game-changer for the market.

Odds strongly favor the bears while we’re under 1,110 – neutral up to 1,130 – but odds would shift to favor the bulls above 1,130.

Until that happens, traders should be cautious and watch these levels intraday very closely.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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