The Game Changer at SPX 1130
Sep 14, 2010: 11:19 AM CSTHere 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
