Theme Thinking – SPY Moving Between Round Number Levels

Mar 31, 2011: 2:18 PM CST

I strongly advocate “thinking in themes” rather than indicators and keeping your focus as much as possible on price structure.

Namely, you want to know “what is price doing and how effectively is it doing in?”

Here – let’s look at the current SPY intraday world to pick up on a theme that you may have missed unless you were watching closely:

It’s often best to reserve at least some of your analysis for thinking in “Themes” or “Concepts” like this.

Ask:  “Is there any obvious pattern that I might be missing?

Market Character/Behavior changes from time to time, and if you’re able to pick up on these little patterns ahead of the crowd, you’ll do a better job as long as the market continues to respond to the theme.

For example, on the rally up off the mid-March low, we’ve seen a consistent pattern of the SPY (market) pausing at a round-number level for a day or so and then busting through the level to the next overhead ’round number,’ which gives intraday traders plenty of opportunity to profit from this simple “theme.”

I’m a huge advocate of chart/trading simplicity and this is about as simple as it gets – simple, but so far effective.

The $130 level (1,300 in the S&P 50o) was a VERY obvious resistance level we all watched and price had trouble overcoming this level initially.

However, once it did (with a little “Finger” or Bear Trap under $129 I might add) then the race was on for intraday traders to play for the next upside target of $131.

Price spent the better part of March 24th struggling at the overhead level and on the next session, price broke above $131 on its journey to $132 – a tradable move intraday.

The market again had similar trouble at the key $132 level as it did at $130 (1,320 and 1,300 in the SP500) and then yesterday we had a gap-up (the expectation and trade follow-through I mentioned was likely in the prior night’s Idealized Trades member report) off the gap opening 50 cents higher to the new $133 intraday target.

Yesterday and today, we’ve had similar difficulty breaking above the $133 “round number” level, though if we do soon (tomorrow’s Jobs Report could be the catalyst), then if the “Theme” continues, we can expect a similar style move to $134.

But if the immediate history repeats, at least on the cases of March 23 and March 29, we’ve had a little “Trap” or “Finger” temporary breakdown of a round number level which led to the fuel to power the market up through the next level.

A pure repeat would take the market down under $132 temporarily and then rocketing again up above $133 on its way to $134.

No one knows what is going to happen, but thinking in themes like this can help you plan out your plays/trades via IF/THEN logic (“IF a breakout happens, THEN I will trade an expected move to my new target”).

Keep your plans objective (non-biased) and based on price structure and always be aware that themes do change – particularly as more market participants pick up on them.

As such, early recognition is always key.  Lessons like this can help you think in terms of price-based market themes.

Corey Rosenbloom, CMT
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