Triple Index EMA Compression Levels to Watch Next Week

Jun 24, 2011: 6:23 PM CST

Well this is certainty a very interesting predicament – the Daily Charts of the three major US Equity Indexes are all showing EMA compression.

Short-term daily moving averages are falling as long-term averages are rising, and price is distinctly trapped BETWEEN these averages that are on a collision course with each other and price will soon be squeezed one way or the other.

It’s a unique situation we should be watching, so let’s start with the S&P 500:

Cutting right to the chase, we’re viewing the 20 and 50 day Exponential Moving Averages (green and blue) along with the all-important 200 day Simple Moving Average (red).  These colors (and averages) remain consistent on all charts I view.

What’s happening now is not just that the shorter term EMAs are barreling to the downside, but the longer term 200d SMA is similarly careening to the upside.

Like a deer in the headlights, price is trapped between these important averages as they speed on a collision course towards each other.

For the S&P 500, watch the falling 20d EMA at 1,290 (and of course the round number 1,300 beyond that) and the rising 200d SMA at 1,265 (and of course 1,250 under it).

We’ll soon get a breakout, but until then, watch for more (frustrating) range action between these two levels.

Here is the similar situation in the NASDAQ:

The main levels to watch are the 2,690 (20d EMA) and 2,700 (round number) level for resistance (and a bullish breakthrough should that happen) along with 2,650 (200d SMA) and 2,600 (2011 low).

Any breakthrough of these levels is likely to be significant and produce a continuation impulse in that direction.  Otherwise, expect further “bouncy” action between these levels.

Finally, the Dow Jones continues to be the relative strength leader, but it’s still in a similar situation:

The Dow Jones is facing 12,200 as overhead EMA and price resistance along with 11,90 as price support with 11,800 as 200d SMA support.  The 2011 low is 11,600 for reference.

There are two ways to expect future action, depending on what happens:

1.  As long as price remains between these compressing levels, play “fade” or short-term intraday bounces between these levels (equilibrium play).

2.  WHEN (not if) price breaks firmly (and closely) beyond the upper resistance EMAs or lower support SMAs, expect (and prepare to play) a potential breakout/impulsive/continuation move (intraday or swing) in the direction of the break.

Be sure to incorporate these “bigger picture” price (and EMA) purism concepts into the other forms of analysis you do this weekend.

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!

9 Comments

9 Responses to “Triple Index EMA Compression Levels to Watch Next Week”

  1. Hudson Eldridge Says:

    Great post, reading your book now, love it. Hudson.

  2. Hgearle Says:

    nice analysis. always a pleasure to see your work. thanks

  3. marketsniper Says:

    More great stuff, Corey! Finished your book and going for a re-read.

  4. jesterx Says:

    Great stuff as usual. 

    I think it is interesting what has happened in the last week, Greece problems, Bernanke admiting US is crappy, and oil problems too. A crazy week, I am guessing there is a bigger move coming on the market. http://www.youtube.com/watch?v

  5. Amaugie Says:

    Why do you use ema for the shorter term and sma for the longer term? Thanks

  6. Sunday links: growing a position | Abnormal Returns Says:

    […] Watch out for some moving average compression this week.  (Afraid to Trade) […]

  7. zstock7 Says:

    I've been looking at the 11,800 line, for a few weeks now.

  8. zstock7 Says:

    thanx jesterx, i'm so glad your company will let you do video's again.

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