Looking back at the S&P 500 and the flash crash, the major market index has tested support and resistance three separate times. Typically, the more times a key level of support or resistance is tested, the weaker it becomes. I've found that three times is a key number of tests to watch. If a key level is tested three times, it is exponentially more likely to break that test. Of course, this has just been an observation of mine over the past several years in my trading, so we'll continue to watch and see what happens.
Since this range is most evident on a 60-minute chart of SPY, I would focus on ETF options on the SPY or other major market indexes, like QQQQ, IWM, and DIA. To play the expected breakout or breakdown, look for a confirmed trend or two consecutive closes outside the range. For example, two hourly closes above SPY $111 would indicate a breakout, so ETF options traders could look at July 108 calls.
By Andrew Hart of BigTrends.com
