A Critical Level to Watch on S&P

11/02/2010 12:01 am EST

Focus: STRATEGIES

Corey Rosenbloom

Founder and President, Afraid to Trade

We all try to make charting complex, but sometimes it’s the simplest facts and realities that give us clues to the most important turns or inflections in a major market.

We’re at one of those points right now in the S&P 500, as seen on the weekly chart below in simplest terms:



Click to Enlarge

I’m only showing the 200-week simple moving average (SMA) and the three times it’s been effective in forming a short- or intermediate-term peak in the S&P 500.

It happened initially in August 2008, then recently at the April 2010 peak, and it’s happening again at the 1,200 level as we end October 2010.

I know it sounds stupidly simple, but one of two things is going to happen:

  1. History will repeat, and thus, the market has peaked and will be heading lower this week and beyond;

  2. History will change (“This time it’s different”) and the market will break solidly above the 200-week SMA (1,200 level) and it will be the confirmation or beginning of a new bullish breakout that could send price up to 1,400 or higher.

Start your analysis with that type of thinking: Either it’s going to hold or it isn’t. And then develop strategies for both contingencies, depending on your activity level as a trader or investor.

The 2010 high, and thus the “new recovery” high is 1,220, so it’s best to wait to see if the index can go ahead and shatter that resistance level. For extra proof, the 61.8% Fibonacci big-scale retracement is 1,228.

If so, realize that there will be a lot of investors and traders who will be forced to do one of these major actions at such a critical juncture:

  1. Sidelined/Doubting Bulls: Holding cash, they may decide “Enough’s enough” and jump in the market with big buy orders;

  2. Frustrated/Losing Bears: Holding short, they may also decide “Enough’s enough” and jump out of the market initially (short squeeze) and then may “flip/reverse” and position long.

    Of course, this week brings us three major market-changing events: Congressional elections, Federal Reserve announcement, and (the typical) jobs report.

How these events unfold—and the market’s reaction to them—will likely determine which of the two scenarios above will occur.

Either we break out or we don’t, and thus reverse here. And what happens here could determine the market direction for months.

By Corey Rosenbloom, trader and blogger, AfraidToTrade.com

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