Triple US Stock Market Check into the Zone

Feb 14, 2012: 12:08 PM CST

Technical traders across the world are monitoring current US Equity Indexes as they interact with the “Zone of Resistance” from their prior 2011 price highs.

Let’s take a quick check-up on where the “Big Three” markets stand at the moment in relation to “The Zone.”

First, the S&P 500 which hasn’t quite cleared the Resistance Area yet:

For reference, what I’m describing as “The Zone” is the cluster of price overlap or resistance from the mid-2011 index highs.

This level became important in 2011 as it resulted in price reversals in February, May, and July in the context of a “Range Consolidation” period in each of these indexes ahead of the August collapse.

Stocks reversed and bottomed in October and have since been rallying powerfully – in a “Creeper Trend” pattern – ever since.

At present, all indexes are either into the Zone of Resistance or else breaking gently above it as in the case of the Dow Jones and NASDAQ (the S&P 500 is the weakest index at the moment, relatively speaking).

As chart traders, we often start with price first and then move to other indicators as confirmation or non-confirmation of what’s happening with price.

Starting at the top, we see an overextended price rally into prior index resistance from 2011.

Going to other indicators, we see negative divergences in momentum and volume, which is a type of non-confirmation of the upward rally.

Strong rallies tend to occur on increasing volume and momentum, and that’s not been the case during the 2012 “Creeper Trend” rallies.

However, going back to our original foundation, we follow price (including trends) as traders and everything else is secondary to price.

This is an important distinction to make because traders who follow indicators first are likely to be short-selling or hedging (or taking profits) into these indicator-based caution signals.

Unfortunately, should price indeed continue trending higher – breaking freely through this resistance – then these same traders will be forced to buy-back to cover their short-sold or hedged positions as other traders will put on new buy-positions or else add to existing positions.

This is exactly the logic of a Positive Feedback Loop which supports these sort of ‘Creeper Price Trends.“  Be sure you understand this logic, as explained in the prior blog posts with plenty of examples of this concept.

Let’s turn now to a quick look at the Dow Jones Index, which has broken slightly above “The Zone.”

Again, we follow price as our top chart ‘indicator,’ and price is currently, arguably weakly, trading above the 12,800 important price level, placing it officially at “New Recovery Highs” not seen since 2008’s Bear Market.

The picture is the same in the NASDAQ, except the recent rally and breakthrough has been stronger, thanks in large part to Tech-stocks like Apple (AAPL):

Another point of comparison is that the NASDAQ is showing short-term strength (increases) in both volume and momentum in 2012, unlike the S&P 500 and Dow Jones which have shown continued declines in both volume and momentum.

NASDAQ Volume and momentum however are still lower than the levels seen at the end of 2011 during the October/November ‘bottom’ period.

So what’s the quick take-away?

Not much has changed since last week’s Triple-Index Market Update.

You can also view last week’s broader perspective view on the Monthly Picture in each of these indexes – it will be helpful in putting any sort of continued price breakthrough higher in context of the larger Bull Market trends since the 2009 official bottom.

The Equity Markets are in a continued conflict between Price (Trend) and Indicators (divergences/overextended rally), which makes it difficult to have strong conviction in your trading decisions, unless they’re on a very short-term basis.

Sometimes, new traders prefer to stand aside when there’s this much conflict between what logically should happened and what’s actually happening.

Stated differently, it’s unusual to see day-over-day ‘creeper trends’ without a meaningful retracement.

This makes it:

difficult to get long because you think the moment you get long will be the exact moment the market actually reverses lower;

and also difficult to get short because despite the logic for at least a retracement if not another reversal, you keep getting stopped out as price continues its ‘creeper trend’ higher.

For me, the solution is to stick with intraday charts and trade short-term opportunities that develop – and there have been some decent classical plays each day.

Of course, the situation would be different if we did see a strong rally and continued breakout higher – that would be expected due to “Popped Stops,” a “Short-Squeeze,” or “Positive Feedback Loop” logic.

It’s this “Price Stagnation and Indecision” within or near the “Zone of Resistance” that’s keeping us all on our toes, anxiously awaiting either a breakout higher or retracement (minimum) or even reversal lower.

Be safe and keep watching the developing structure as unbiased as possible.

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!

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Comments
  • Vijaya Singh

    Chart reflects the reality and how market moves you can know more here

  • Theyenguy

    The monthly chart of S&P, $SPX, traded by SPY, communicates that we are at the crest of an Elliott Wave 2 high, and are going to enter an Elliott Wave 3 Down, as is seen in Daneric’s Elliott Wave article 15 February 2012. These are the most destructive of all economic waves as they destroy practically all of the wealth accumulated on the way up. The Great Deleveraging, that is Great Depression 2, is about to commence.

    Dow Theory holds that Industrials, IYJ, and Transports, IYT, make market turns together. In as much as these both traded lower today, the Great Deleveraging, likely commenced. The chart of Transportation, IYT, shows a rounded top, and a fall lower out of an ascending triangle, suggesting that transportation stocks are headed irretrievably lower. Jack D. Stevison writes in article Dow Theory, this looks like a “non-confirmation” to me. It’s the like the Dow Transports are saying, “We’re not as strong as you industrials are. We’re just not able to move the stuff that you’re producing. So whomever is buying your stocks, well, they’re getting ahead of themselves.

    Confirmation of the start of the Great Deleveraging comes from Steel, SLX, and Metal Manufacturing, XME, trading lower, on a likely exhaustion of growth, that comes from the failure of the global debt trade, which is seen in World Government Bonds, BWX, having turned lower, and from the exhaustion of neo liberal finance and fears of Greece Default. 
    Other confirmation of the start of the Great Deleveraging, that is Great Depression 2, is that base metals, DBB, traded lower, with  JJC, JJT, JJU, JJA, and LD, trading lower.

    The fiat wealth system known as Neoliberalism, that has governed the world for the last forty years is now passing away. The diktat system known as Neoauthoritarianism, is rising in its place. 

    Bespoke Investment Group reports Breadth Weakens While it may seem as if the market has been doing well lately, it really hasn't done anything over the past ten trading days. Since February 3rd (a Friday), the S&P 500 is flat, and the Dow is actually down about 100 points. While Apple, with its huge weighting in the S&P 500 and Nasdaq, has really helped buoy the market over this time period, underlying breadth has weakened, and the VIX fear index has shot up 25%. As shown below, 78% of the stocks in the S&P 500 are currently trading above their 50-day moving averages, down from a reading in the mid-80s earlier this month. Apple can't go straight up forever, and if it does pull back or trade sideways for awhile, it will be interesting to see if the rest of the market picks up the slack or completely falls apart.

  • Naveenkumar1977

    Hey Hi Dear Corey ..excellent coincise to the point ,great work dude !!!  Would Appreciate if you could do some similar work on Indian stock indices and post it for for your indian friends .. Thanks

  • The rest of february promises some interesting trading. I am going to stay out of a lot of markets until it's clear that the majors (indices) have decided on a direction, either up or down. I'm betting on down. I might trade the US dollar index making long trades so long as it continues to point upwards while the indices and metal go downwards. I'll probably also be shorting sugar.

  • ralph braseth

    Appreciate your insight. Very helpful for a guy who watches from the sidelines trying to learn.

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