After consolidating in a similar “Range Value Area” for the majority of 2011, the US Stock Market Indexes have settled into a NEW consolidation phase that calls for updated boundary levels.
Let’s take a look at how the Range Alternation Principle developed the two large Value-Area boundaries of 2011 and what the current index levels are for reference.
Let’s start with the S&P 500:
First, let’s define what a “Range Value Area” is. Reference my prior two similar updates for more information on these types of situations:
The main idea is that price structure tends to find “Value” or equilibrium/balance between buyers and sellers and then oscillate (trade) both above and beneath the currently accepted perception of “Value.”
While price remains within these well-defined boundaries, it becomes risky to be long into the “Upper Resistance Line” and as price trades down to the “Lower Support Line,” it becomes risky to remain short.
Thus, most strategies call for trading up and down (long and short) within the context of an established “Range Structure” such as these and place the stop slightly beyond the reference levels.
Price DOES NOT remain within Range Parameters forever – price alternates/shifts into a Range Expansion or “Trend Breakout” phase of sudden/violent movement as buyers/sellers seek a NEW Value Price, at which time NEW upper resistance and lower support levels will be established.
Right now, the current S&P 500 reference levels include 1,220/1,230 as the “Upper/Expensive” Line and 1,100/1,120 as the “Lower/Cheap” Line.
As we trade currently near 1,120, either the lower support line will hold (allowing for bullish trades short-term off support) or it won’t (triggering stop-losses under 1,100 which likely leads to a “Range Breakout” impulsive move down to lower targets such as 1,020/1,040).
In this way, you can use the current objective levels to plan your short-term trades/positions within these boundaries.
Here is the structure on the NASDAQ:
Throughout most of 2011, Upper Resistance formed near 2,850 with Lower Support simply at 2,600 as buyers/sellers formed equilibrium/balance (Value) near 2,750.
The current boundaries exist at 2,600 (resistance), 2,350 (support) and 2,490 (“Value”).
The picture is slightly different – at least in early 2011 – in the Dow Jones:
You can see how the Dow Jones had slightly rising “Boundary Reference Levels” when compared to the flat levels of the S&P 500 and NASDAQ.
Nevertheless, price broke through the lower support boundary at 11,800 which continued the “breakdown” impulse to the 10,600 target, at which time the current reference levels are in play:
Upper Resistance: 11,500
Lower Support: 10,600/10,800
If you’re unfamiliar with this concept, take a moment to review my prior updates and how the market progressed relative to these important reference areas.
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!