Midweek Market Update and Lesson on Resistance Divergences

Aug 19, 2010: 11:18 AM CST

I thought today would be a good chance to take a quick look at the daily chart structure of the S&P 500 and highlight the recent negative dual divergences into overhead resistance and the anticipated ‘mini-crash’ (can we call it that today?) that followed from that set-up.

Let’s see it:

Let’s lead up to today’s sharp downside move.

First, look at the absolute swing high that occurred recently on August 9th (vertical highlight).  If you look closely, you’ll see that volume and momentum (3/10 oscillator) along with internals (not shown) all declined as price reached its final peak.

It did so as price rallied squarely into clear overhead confluence resistance at 1,130 – and though the market held up for a few days, the crash (I use the word ‘crash’ to denote a sharp, one-day or longer downside move) was all-but guaranteed.

Those were the situations that formed ahead of the prior one-day plunge, and today we had a similar structure form, though it was more evident on the lower timeframe charts.

We had a push up suddenly into confluence resistance at 1,100 as additional reversal candles – notice the upper shadows – formed at the 1,100 level and momentum, volume, and internals all diverged (intraday charts) as price clawed its way to the overhead resistance.

A drop today was all but guaranteed.

When the market moves in these sort of conditions – falling after pushing into overhead resistance on negative divergences – we can say the market is ‘doing what it is supposed to do’ – or at least making sense from a chart standpoint.

That’s not to say that price WILL fall on similar conditions – but that odds strongly favor a fall.

In the event that price – in either instance – would have shattered resistance either at 1,130 on August 10th or above 1,100 today, then we would expect the market to rally sharply to the upside on a pattern failure, which would trap all the bears/short-sellers and force them to cover by buying shares.

I call this scenario “Popped Stops” which allows the intraday trader to take advantage of situations where the market “should” do something but instead does the opposite.

That’s how you trade – you don’t call out the future with 100% certainty.  You set-up and assess the odds from the charts as you understand them, develop an “IF/THEN” situation, put on a position, and then manage it when new information comes in, which sometimes means stopping out and flipping your position on a key unexpected break.

These are the kinds of lessons I highlight each night in the Idealized Trades intraday reports.

As I said in last night’s post, the more you learn these patterns by studying the charts, the better you’ll be in real time to identify and trade the markets as these opportunities/set-ups repeat.

They do repeat.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

1 Comment

One Response to “Midweek Market Update and Lesson on Resistance Divergences”

  1. John Says:

    Great analysis Corey. A close below 1060 wouldn't be good… It would destroy the inverted H&S we have on the daily chart.
    I'm waiting for a confirmation of an intermediate trend: 1 way or the other.