SPX Update and Lesson in Trendline Breaks and Targets

Nov 16, 2010: 12:30 PM CST

Today is a good day to brush off the old Technical Analysis 101 handbook to review a simple – yet very effective – concept regarding trends.

In a trending environment, price often retraces to the 20 day EMA to continue the move in place.

However, if ever the 20 day EMA breaks – and it certainly will eventually – the next target immediately sets up as the 50 day EMA.

It’s happened three times in the last few months – so let’s see those examples, learn the lesson, and get an update on the S&P 500 and Dow Jones Indexes.

First, the S&P 500:

Starting with the downtrend that took us into June, we had a sudden breakthrough of the falling 20d EMA which led two days later to a full retest of the falling 50 day EMA – which was the minimal target.  The 50 day held as resistance and the downtrend continued.

An identical situation occurred in July, only this time price took three days to hit the official 50 day EMA target, but this time the downtrend ended shortly after the 50 EMA held as resistance.

Flash-forward to today, where price broke solidly through the rising 20d EMA this morning which set-up an immediate fall (or test – or intraday opportunity, as I was calling for in last night’s report to members) to the rising 50d EMA.

There are two indicator convergences to be aware of – and the most important is the rising 50 day EMA currently at 1,168.  It’s an immediate target for potential support.

The other is the lower Bollinger Band at 1,163.  Thus, we have a price convergence at the 1,165 level.

It will be important to watch closely what happens there – if price bounces up off the support at this level (similar to what happened in June) or breaks right on through this level to challenge 1,150 or even the 1,130 level or lower.

Despite what people thing, uptrends – though powerful – cannot last forever, so they must end at some point.  The trick – of course – is weighing the objective evidence to see if it favors trend continuity (yes, if price supports off the 1,165 level) or not (no, if price breaks down through 1,160 then 1,150 and beyond).

To underscore the EMA targeting lesson, let’s take a look at the current Dow Jones, which officially hit its target in a single session.

I wanted to highlight the times where price was in a trending mode and the 20/50 EMAs were separated by a stable distance.

In a flat/rangebound environment, this concept has no meaning as the moving averages do not hold as support or resistance (as in the late July to mid-September periods).

When the EMAs are separated in a price trend up or down, look first for price to inflect off the 20 day EMA, but if price breaks through the 20 EMA, look for an immediate – often intraday – target move to challenge the 50 EMA.

Unlike the S&P 500, the Dow Jones Index fell 200 points today to test EXACTLY (so far) the 50 EMA. As of noon EST, the intraday low was 10,986 and the 50 day EMA was 10,987.

Of course, intraday traders can look to position aggressively if there are corresponding intraday buy signals at the target level … but that’s a whole other lesson to learn.

Join me Thursday, November 18th at 11:00am EST for a live-cast webinar from the Vegas Expo:  “Popped Stops – Profiting When Good Trades Go Bad.

Corey Rosenbloom, CMT
Afraid to Trade.com

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


4 Responses to “SPX Update and Lesson in Trendline Breaks and Targets”

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    […] So, buyers/bulls need to hold the $25 level to keep this up-move going.  Any breakdown under $25 immediately targets the 50 day EMA – similar to the logic I used in this morning’s post on the S&P 500 and the 20/50 EMA targeting method. […]

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    […] in trendline breaks and targets : http://bit.ly/aQnBDu […]

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    […] a look at my prior “Playing EMA Breaks” lesson post for how trends and EMAs work in terms of setting quick plays and […]

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    […] S&P 500, as price broke the rising 20 day EMA, the immediate target was the rising 50 EMA, as I explained in a recent post on the S&P 500 with a similar […]