The Game Changer at SPX 1130

Sep 14, 2010: 11:19 AM CST

Here we are again, testing the key 1,130 target overhead resistance level for the third time in the last three months.

The simple question is “Will resistance hold or will it break?” and of course you can get a lot more complex than that, but I strongly advocate you think in those terms – as simply as possible – and plan for a scenario to trade if resistance breaks or if resistance holds.  That way you won’t be caught off guard.

Let’s see what I mean:

First of all, there is a dominant chart pattern where history has now officially repeated three times.

I originally discussed this pattern – and now we have the expected/successful outcome of that pattern – in my September 2nd post:

“Third Time’s the Charm?  The S&P 500 Daily Rally Pattern.”

Now we’ve completed the “Third Time’s a Charm” rally back off 1,040 into the overhead resistance at 1,130 – the target – and now we play the “Will it or won’t it” game again.

There are two scenarios:

1.  IF History Repeats…

If history repeats, THEN we will see a halt of the market rally here and a turn back down in a sell-swing that could take the market all the way back to 1,040 in a similar fashion as the sell-swings in June and August.

2.  IF Price Breaks Out…

If the “Third Time’s a Charm” results in the market actually breaking upwards above the key 1,130 resistance level, THEN you can expect this market to surge – potentially very violently in a vicious short-squeeze – back to the overhead price target of 1,170 or even as high as 1,200 or beyond.

Yes, no matter what you believe, think, or what the charts are showing, the S&P 500 could indeed rally to a new 2010 high within the next few months.

It’s like the Mark Douglas principle:  “The market can do anything” and if you turn a blind eye to the bullish action because you believe it absolutely can’t happen, then you will first miss an opportunity to trade a breakout play long, and second, more unfortunately, you WILL lose money if you fight this market by shorting it as it breaks out… IF it breaks out.

If history repeats as everyone thinks it will, then you short the move and make money as price falls.  Simple.

But if you get caught up in your believe that the market HAS to fall and then the market breaks out above 1,130 and travels to 1,170 and perhaps to 1,200, then your inability to plan for that possibility in your analysis and trading could leave you devastated.

Remember, no one knows with 100% certainty what is going to happen next – and as traders, it’s our job to PLAN for possibilities and then trade them when we get triggers or entry/exit signals.

Scenario 1 or 2 will happen – resistance WILL break or it WILL hold.  It can’t be both.

Be ready.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

13 Comments

13 Responses to “The Game Changer at SPX 1130”

  1. blues Says:

    How about we break out to 1150-1160 and then dive below 1040?

  2. keith piccirillo Says:

    IF we bust up through 1130 any particular sector have more relative strength/weighted alpha?
    XLB would be my guess.

  3. Corey Rosenbloom, CMT Says:

    That would not be fun!

    I do think any break above 1,130 is likely to lead to a round of “popped stops” or a short-squeeze from the short-sellers who are already committed and forced to stop out. It would also likely lead to a round of new capital coming back in the market – bulls – who were waiting for the breakout. That's why I think a break could have legs, but no, 1,170 is not a magic number that the market has to hit – it's just a possible target based on a prior swing high.

  4. Corey Rosenbloom, CMT Says:

    That's a really good question.

    We always look to Financials XLF and Technology XLK to lead the market on any rally with legs, but materials could indeed be strong.

    I'd suggest doing a bit of current relative strength work, which can be as simple as looking at RS lines in StockCharts.

    That would be typing in ” XLF:$SPX ” or “XLB:$SPX ” to compare which sectors currently have the highest/rising relative strength lines to the S&P 500.

  5. keith piccirillo Says:

    Thanks CR.

  6. Don-Da-Mon Says:

    I don't comment often, however, 1150 was the target I mentioned a while back. It tests the Jan 19th high, tests into the flash crash zone and makes a head and shoulders. We are in the bull trap now since Aprils high.

  7. del Says:

    We can interpret same in 2 different ways. One sees a horizontal range on SPX resistance at 1130-1040support the other sees a downward channel which got violated 2 upside at 1100 implying that we go up n 1130 may offer a hiccup resistance n nothing more?

  8. Don-Da-Mon Says:

    Del, yes, I see this as a downward channel which is now violated (i.e. bull trap)

  9. del Says:

    Don–How is violating of downward channel a bull trap. Any indications will help me to understand. I don't trade on opinions neither mine nor others.

  10. M. Elmore Says:

    If 1130 isn't breached, & the SPX retraces, could we draw a line, from low point in July, through low point end of Aug, and see the trend as an “ascending triangle”. Then look for support, on the bottom line of the triangle. If that doesn't hold then next stop 1040. If index bounces, then get long to 1130 again, then play it from there accordingly. Just a thought!

  11. SP500 Levels to Watch and Market Realities You Should Know | Afraid to Trade.com Blog Says:

    […] mentioned this earlier in my “Game-Changer at 1,130” post where I defined the upside […]

  12. SP500 Levels to Watch and Market Realities You Should Know Says:

    […] mentioned this earlier in my “Game-Changer at 1,130” post where I defined the upside […]

  13. Marble Polishing Delray Beach Says:

    We can interpret same in 2 different ways.