Triple Index Checkup and Simple Levels to Watch

Feb 24, 2011: 1:10 PM CST

Now that we’ve had a few days to digest the Libya fallout and surge in oil prices, let’s take a look at the triple-index update for the interestingly simple daily chart reference levels that mean the difference between “simple pullback” and “early trend reversal.”

Let’s start with the S&P 500:

Let’s start with a general principle in technical analysis that will be applicable to all three indexes – something I’ve shown many times in the past:

In the context of a rising uptrend, price tends to find support at the rising 20 day EMA.

In the event that price breaks under the rising 20d EMA, look to play a move to the rising 50 day EMA.

A trend reversal is more likely and expected ONLY if price strongly breaks under the rising 50d EMA and prior price lows.

Of course, divergences are earlier warning signals of potential trend reversal – and a pullback that is preceded by massive divergences is MORE likely to lead to reversal than a simple retracement pullback that is not accompanied by massive divergences.

Anyway – so taking that into account, price broke swiftly under the rising 20 day EMA at 1,313 and now is hovering at critical “Round Number” index support at 1,300.

It’s on a likely pathway down to the confluence at 1,280 (50d EMA and lower Bollinger) but the only chart-based stopping point is the simple 1,300 ’round number’ level where we are now.

A breakdown under 1,300 – a failure for bulls to hold this level – means we almost certainly will see 1,280.

And by that logic, should bulls fail to “buy this pullback” as they have done many others, it would open up the door to a change in market character, change in participant psychology, and could be the catalyst that sparks a feedback loop of panic.

By that, I mean buyers who may still be holding long now will then be forced to stop-out and sell on the breakdown under 1,280 which would embolden sellers as they take that as a sell signal.

The potential exists for a swift ‘crash-like’ move if buyers fail to defend the 1,300 then 1,280 levels.

As such, these are the levels you should reference very closely as a short-term trader.

The levels are identical in structure in the Dow Jones:

I’ll let the chart speak for itself:

The key is the simple 12,000 “round number” reference level which would give-way to a play to 11,900 (50d EMA and lower Bollinger support) if broken.

The game will change under the 11,900 and 11,800 level.

The NASDAQ – often a market leader – has already slammed its 50d EMA and is perched precariously there:

This is one of those chart “Make or Break” moments.  Either buyers can beat-back a challenge from the sellers here or they can’t.

If the Libya news – combined with everything else going on – is just too powerful for the bulls to rush in and support the market, then we could see the psychology change which could result in quick exodus from the long-side, resulting in a swift downside potential.

The key for the NASDAQ is the 2,700 level where it is now.

So there are two dominant/leading scenarios for the market going forward:

The bullish scenario is that this is just a bump in the road, similar to what we saw through November where price broke the 20d EMA but supported carefully at the rising 50d EMA and continued its rise.

The bearish scenario is that “This is Something Different” and if sellers push indexes under their rising 50d EMA, then the technical game will change to the bears.

That’s the power of identifying market inflection points – we never 100% know what will happen, but can see them in advance and prepare ourselves to react no matter what happens – provided we are not blindly bullish or bearish, but open to the reality spoken by price.

So far, the game belongs to the bulls to lose – as long as we’re above these levels.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

4 Comments

4 Responses to “Triple Index Checkup and Simple Levels to Watch”

  1. Tweets that mention Triple Index Checkup and Simple Levels to Watch | Afraid to Trade.com Blog -- Topsy.com Says:

    […] This post was mentioned on Twitter by Corey Rosenbloom and mozartom, webIR. webIR said: RT: Triple Index Checkup and Simple Levels to Watch http://bit.ly/ihKDJc via @afraidtotrade […]

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    […] on Intraday Market Internals Shows Make or Break for SP500 Feb 24, 2011: 1:41 PM CST In my prior post about key inflection points on the three major US Stock Market Indexes, we saw quick, easy reference levels to watch, including 1,300 for the S&P […]

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    […] a major trend reversal signal that could lead to another spike in volatility – but of course watch for the triple-stock market indexes to break their key daily support (1,300/1,280 in the S&P 500, for […]

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    […] already lost the 1,300 area and – by a few points – lost the 50d EMA, but as we push to new lows on the morning […]