Support Bounce or Breakdown Planning for the SP500 and Dow

Oct 10, 2014: 11:08 AM CST

Both the S&P 500 and Dow Jones Indexes are challenging major support levels that demand our attention.

Let’s quickly assess the situation, highlight the inflection points, and adapt our strategies accordingly.

The chart above shows the S&P 500 retracing strongly – similar to January 2014 – toward the rising 200 day SMA target (1,900/1,905 confluence).

We’ll focus all our attention on this level – buyers are favored above this level and short-sellers (bears) would strongly be favored beneath it.

Should the market break under the rising 200 day SMA, it would be the first time in 2014 to do so.

The market dipped slightly under the 200 day SMA two times in 2012 and each time an intervention buying spree saved the market from a reversal.

We’re again asking the question “Will history repeat or will this time be different” with respect to similar interventions in 2014 that prevented additional selling.

Here’s a pure-planning perspective using the Dow Jones Index:

In my analysis and trading, I like to draw “Price Pathways” which represent a Dominant Thesis (what I think ‘should’ happen) and an equally possible Alternate Thesis.

I trade, therefore, in the context of whether price is following the “Dominant” or logical thesis or else violating this thesis with a surprise move that is likely trapping many traders on the wrong side of a surprise movement.

The Dow Jones Index twice (previously in 2014) tested the rising 200 day SMA for an identical “Will it or Won’t it Hold” planning scenario.

Notice the Green and Red price pathways then and now.

Both times, buyers intervened to support the market at this level, finding good values at lower index prices.

If history repeats, they’ll again intervene and send the market rallying back toward the highs as short-sellers help push price higher with their collective stop-losses (a short-squeeze).

Otherwise, if “this time is different,” then we’ll trade bearishly as buyers will be the ones helping the market fall with their collective liquidation (stop-loss) orders.

Either way, we must be open-minded and adapt to which of the two price pathways the market travels.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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4 Comments

4 Responses to “Support Bounce or Breakdown Planning for the SP500 and Dow”

  1. Bounce or Breakdown Market Update for Oct 10 | Afraid to Trade.com Blog Says:

    […] Today we saw a (near) test of the 200 day SMA as I highlighted in this morning’s update. […]

  2. Bounce or Breakdown Market Update for Oct 10 - Trading Your Own WayTrading Your Own Way Says:

    […] Today we saw a (near) test of the 200 day SMA as I highlighted in this morning’s update. […]

  3. Market Struggles Desperately to Rally off Weekly Target | Afraid to Trade.com Blog Says:

    […] quickly note that the 1,925 price confluence (rectangle) then the recent confluence of the rising 200 day SMA with the 1,900 “Round Number” level also failed to stop the bearish […]

  4. Market Struggles Desperately to Rally off Weekly Target - Trading Your Own WayTrading Your Own Way Says:

    […] quickly note that the 1,925 price confluence (rectangle) then the recent confluence of the rising 200 day SMA with the 1,900 “Round Number” level also failed to stop the bearish […]