Bouncing Yet Again off that 20 day EMA

Apr 23, 2010: 9:50 AM CST

In a prior post from April 19th entitled “The S&P 500 Teaches the Importance of the Rising 20 day EMA,” I highlighted how the intraday low was the exact value of the rising 20 day EMA… and now the market has bounced yet again off that level on Thursday, underscoring the importance of watching higher timeframes on intraday charts.

Let’s take a look at the follow-up chart:

In a seemingly non-stop trend or impulse move, we need to watch moving averages as likely support (or ‘buy-in’) targets and almost ignore everything else it seems until price breaks under the 20 EMA (or rising trendline).

Moving averages – in trending environments – serve as ‘auto-support’ zones and self-fulfilling prophecies, in that traders see price heading to that level and then decide to buy, while short-sellers (particularly intraday) might decide to take profits on any short position as price hits their target price (again, the 20 EMA).

That helps explain – in part – why price is expected to bounce off support at the key moving average levels – people watch them and then act accordingly.

For now, we have resistance at the 1,212 area and support rising off the 1,190 area (also a key trendline) so price is trapped between them now.  A break above 1,213 solidly should – unsurprisingly – lead to more “Popped Stops” from the short-term bears who just got short and would be forced to take stop-losses (buying to cover).  But that’s a different story.

The trend is still up and the trendline and 20 EMA have still held as support.

This situation will change only when we get a clean break under 1,190 and not until.

Corey Rosenbloom, CMT
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2 Responses to “Bouncing Yet Again off that 20 day EMA”

  1. terlyn Says:

    There is an uneasy quiet this morning and a consolidation. Could this be in advance of a breakout?

  2. Corey Rosenbloom, CMT Says:

    It sure does have that feel – definitely. We even had a little head-fake early this morning and that's usually a precursor to a breakout, if we can build up enough steam prior to the close.

    Definitely feels like there's a lot of pent up energy out there for sure to break through, but we'll keep watching.