Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Will the S&P 500 Continue Higher Highs?
10/13/2009 12:01 am EST
I wanted to give an updated look at the S&P 500 charts regarding previous posts I’ve done on whether or not we would be heading to a new high in the S&P 500.
Let’s take an updated look now that history has indeed repeated and also step inside the three most recent “short squeezes” on the SPY and S&P 500.Starting with an updated look at the SPY daily chart:
In prior blog posts, I mentioned that the pattern looked eerily similar to the prior “surprise” rallies that were fueled in part by short covering (buying pressure to exit positions with losses). The yellow highlighted regions reflect the “short squeeze,” while the red regions represent valid and classic short-sale signals (be they from momentum or volume divergences, and/or breaking beneath the 20-day EMA).
These failed sell signals started with the July breaking of the widely publicized head-and-shoulders pattern, which led to a massive short squeeze (so many people were 100% convinced the market was going to break to new lows from this pattern).
From there, buyers have invalidated (or busted/broken) three additional short-sell (swing trade) signals, resulting in snap rallies to break to new 2009 highs each time.
Let’s step inside the highlighted zones above and see them on a plain 60-minute chart:
Not only were there valid divergences, but there were large downside (morning) gaps and strong selling days that preceded the reversals to the upside, which tells us that shorts were entering positions, and as the market for whatever reason began to reverse, an “avalanche” occurred as prices rose, which triggered stop losses and drew in fresh buyers.
Notice the swift upside gaps and strong up bars in each of the highlighted regions, especially the current region, which began on October 5.
What Is the Implication?
As I mentioned previously, odds strongly favored a retest or breaking of the 2009 high, which occurred yesterday (a re-test). Should price continue to nudge slightly higher beyond $108.03 in the SPY and 1,081 in the S&P 500, then we will see more short sellers be stopped out, which will create further upside bursts.
This is the new reality of the market until proven otherwise—a near total dominance of buyers over sellers. Whatever force that is driving prices higher is stronger than classic sell signals, and perversely, higher prices occur as a result of the mentality that “The rally can’t go up any further… it has to come down” (via the buying pressure the stop-losses that are triggered cause).
This “new reality” (where every sell signal is false) will not persist forever, but until we see cracks in the bullish armor, you need to be aware that the classic rules appear to be suspended temporarily in the current environment.
Call it the Twilight Zone where sell signals are actually buy signals, but be aware that the current environment calls for caution on the short side and an “innocent until proven guilty” stance for the market.
I’m always reminded of Mark Douglas’ main point in the classic book Trading in the Zone: “Anything can happen in the market” and “Each moment [in the market] is unique.”
By Corey Rosenbloom of AfraidToTrade.com
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