Where Does Today’s Action Leave Us?

Apr 1, 2008: 5:13 PM CST

First of all, today’s action came as a surprise to so many traders, myself included. Let’s look at some key facts to discover what may have changed due to today’s action:

First, the DIA (Dow Jones ETF) Daily:

Price aggressively violated its 20 and 50 period moving average, giving no respect to these levels. Recall that during consolidation phases, oscillators trump moving averages for trading support/decisions. This fact is a confirmation that we are currently experiencing a ‘trading range’ environment which spans from near $120 (Dow 12,000) to $127 (Dow 12,700). Unless the bullish action of today’s movement can push price beyond the $127 consolidation zone, we could expect price to return back to the ‘value area’ which has established. It wouldn’t surprise me a bit to see the bulls push price above this critical level on the daily charts.

Short-sellers – take note. Those funds who have been pushing down the market with selling pressure could cover their positions quickly and aggressively should the market rise enough to trigger their stop-loss levels (exiting a short-sale requires you to buy the shares to ‘cover’).

The market sits at a precipice, but I would imagine most people thought the market would be sitting near the $120 level or lower to be on the edge of a precipice. Instead, the market has tested the upper range of the consolidation period. Perhaps that’s a major reason today’s action was so strong after all.

Let’s peek at the weekly chart of the S&P 500:

Two critical components to highlight:

First, a positive momentum divergence preceded the last 3 weeks’ upward movement.

Second, price has two levels of overhead resistance to overcome

– the 1,375 level corresponds with the falling 20 period moving average
–1,400 corresponds with a resistance/support level in the past

While commentators are calling this a ‘major bottom,’ (and that may be), it’s generally a good idea to wait for confirmation rather than being hasty and jumping in because the news told you it might be time to buy. Although the market is likely to experience higher prices due to short-covering and bottom fisher activity, you may be better served to let the market shatter these levels before you get super-bullish yourself.

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