Let’s take a look at the S&P 500, Dow Jones, and NASDAQ to compare current structure and what may occur on a breakthrough beyond these prior high resistance levels.

First, the S&P 500 Daily Chart:

The S&P 500 lags behind both the Dow Jones and NASDAQ currently, both of which already are testing (or breaking) their May 2011 price high.

The S&P has two little levels of overhead resistance from prior swing highs in July to overcome before breaking through to new recovery highs.

In terms of the broader picture, the main idea is that any continued push beyond these 2011 level opens the price pathway into “Open Air” which raises the expectation that price will continue moving higher into past resistance targets.

To see that on the weekly chart, let’s view the S&P 500 Weekly Perspective:

The S&P has nominal resistance into 1,350 and the 2011 prior price high is 1,370.

A breakthrough above these levels opens the door towards 1,400’s Round Number target and then into April 2008’s 1,440 target.

Should we see a future breakthrough above 1,440, then 1,500 extends to the new target and so on.

The situation is roughly the same in the two other US Equity Indexes, so let’s take a quick view of them.

The Dow Jones – as of this morning – fell just a few points shy of breaking through its 12,876 prior high from 2011 but that factor could change quickly.

A firm breakthrough soon above 12,900 suggests 13,000 will again be realized, and beyond that extends the target towards 13,500.

Yes, there are negative momentum and volume divergences in all indexes, but price in a strong trend – particularly the “Creeper Trends” we’ve been seeing lately – can overrule or overpower signals from any indicator.

It’s another way to say “Price is King” – these creeper trends remind us of that fact.

Finally, here’s a quick look at the NASDAQ which did break to new recovery highs today:

While the NASDAQ pushed to new recovery highs this morning, the key “round number” to watch is 2,900 for easy reference.

Here’s the Main Ideas from a simple charting and trading standpoint:

Either the indexes will continue their impulse/rally higher and thus break through these important levels, or else we’ll see yet another reversal lower.

Should the indexes continue their rallies and break through, we would look to play bullish developments into the “Open Air” beyond these levels.

However, if again these key prior resistance levels again hold, we would be cautious from the long side and aggressive/short-term traders may decide to play bearish set-ups on a movement down from these levels.

This type of logic helps us create our real-time planning (game-plan) for whatever style trading we use (swing, intraday, position).

Don’t get caught in either bias that price MUST break through these indexes or that price MUST reverse lower – price (supply/demand imbalance) will do whatever it does, with or without us as traders.

Reference these key levels and their importance to the bigger picture of the broader equity markets.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

(UPDATE:  The links below are updated to the archive presentation you can view)

I’ll be answering common trader questions and describing how exactly to combine two timeframes to assist your trading decisions.

I’ll also show common mistakes of assessing two or more timeframes (and the “paralysis by analysis” that often develops).

Sponsored by Trader Kingdom, ICE Futures, and Mirus Futures, here is the direct link to attend:

“Two-Timeframe Trading Tactics and Set-ups”

January 31, 2012 at 4:30pm EST/3:30pm CST

Here’s a broader description of the webinar:

Join Corey Rosenbloom, CMT, as he addresses these questions and outlines how traders can capitalize on opportunities created by a conflict between two timeframes.

Topics will include how to:

• Identify structure on a higher frame and then use lower frames to pinpoint more precise entries
• Open-trade management in the context of a higher timeframe development
• Confirm and trigger more efficient entries into breakout set-ups, reversal opportunities, and pro-trend retracement situations

Corey will also share specific entries of trade logic building mostly from the intraday and daily timeframes that you can incorporate into the strategies you are using currently.

If you can’t attend the webinar today, you’ll be able to receive a recording shortly after the presentation by registering.

Thanks to everyone for making this possible and I’m looking forward to it!

Corey

Let’s take a look at these levels to watch and perhaps develop trades on any breakout from these levels.

First, the simple S&P 500 Daily Chart:

Removing all other factors, the Daily S&P 500 index faces a key “support test” at the confluence of the rising 20d EMA (1,297) and round-number 1,300 level.

If buyers step in here, we would be looking for a rally (and trend continuation) into 1,340 and any upward break above the 1,340/1,350 target allows for more room to run to the upside 1,375 Bull Market Recovery High last seen in May 2011.

Of course, should buyers fail to support the market at this logical retracement support level, downside targets such as 1,280, 1,260, and perhaps even 1,200 would be favored.

The Dow Jones Index shows a similar support level, but a major resistance level overhead:

The most important thing to me in the Dow Jones chart is not the rising 20d EMA support confluence, but the huge Wall of Overhead Resistance into the 12,800 level.

In other words, the Dow Jones Index is just a few points away from breaking to new bull market recovery highs above the May 2011 peak (12,876).

For traders, this is a key inflection where “Something’s Gotta Give,” and you can develop trades based on what happens (or more specifically, which price level fails/breaks).

From a logical standpoint, a breakthrough firmly above 12,900 will initially force short-sellers to buy-back their losing positions which may join with sidelined buyers who put on fresh new buy-positions or else add to existing bullish positions.

That is the logic of Positive Feedback Loops in price, particularly on firm breakthroughs above ‘obvious’ resistance levels.

Of course, a failure to break obvious resistance does not trigger a bullish feedback loop, and instead argues for price to fall lower to test previous support targets, which include 12,300, 12,200, and of course 12,000 in the Dow Jones.

As short-term (hopefully unbiased) traders, let’s watch these key support and resistance levels very  closely this week.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Let’s take a look at the current situation and put it in the context of prior S&P 500 day-over-day one directional movement.

First, the hourly S&P 500 pure price chart:

Let’s first define a “Positive Feedback Loop” and see how that concept explains these situations.

A Positive Feedback Loop occurs when one action leads to continual (or more) of the same action, such as higher prices resulting in higher prices, with these new higher prices resulting in even higher prices, and so on.

A real-world example includes situations of alarm or panic in a crowd, where a small number of people initially exhibit panic behavior (perhaps screaming or rushing for the exits) which leads to more people exhibiting panic behavior, which in turn leads to even more people in the crowd exhibiting panic behavior until everyone in the crowd is sufficiently panicked or else has escaped the building or situation.

By contrast, a Negative Feedback Loop – in the above example – would be when there is initial activity of panic but yet an authoritative announcement is made where people respond to the announcement and cease panicking.

Thus negative feedback loops occur when an initial situation is cross-checked by an opposite force that results in stability (or a return to normal) instead of increased activity that develops from un-checked activities in positive feedback loops.

In price, positive feedback loops develop from an initial price movement – often on a breakaway from a range or period of consolidation/contraction (negative feedback) – and then are sustained due to both sides (buyers and sellers) taking the same action for different reasons (one to make money; the other to stop losing money.

In the case of price moving higher in a positive feedback loop, an initial price breakout…

• causes those who are short to cover, which is a buying activity, which…
• triggers buy signals for bulls who either add to existing positions or else put on new positions, which…
• triggers those ’stubborn’ short-sellers (with wider stops) to buy-back to cover, which…
• excites more buyers to step in, again adding to positions or putting on new ones…

all of which leads to a perpetual upside trend or impulsive rally that develops a Positive Feedback Loop.

The feedback loop tends to end in one of two ways:

• All bulls who wanted to buy have all been filled (and are long)
• All bears who needed to buy-back to cover have exited their positions.

That’s an oversimplification, but it’s a good starting place to think about feedback loops in price.

Here are three prior Daily Chart examples of persistent Feedback Loops in the S&P 500:

I’m showing three smaller Positive Feedback Loop (trend) periods from the recent action.

Keep in mind that Positive Feedback Loops develop to the downside as well – the panic example above is a good illustration how some buyers initially rush for the exits which emboldens short sellers, and as price falls lower, more buyers rush for the exits – this impulse took the S&P 500 from 1,350 to 1,100 in about 12 days – where all but one of those days were down days.

October 2011 and January 2012 show us classic examples of Positive Feedback Loops in impulsive, one-directional day-over-day rallies.

Two other periods show similar characteristics, though on a larger scale:

During the second round of Quantitative Easing (announcement and official implementation), price developed an initial impulse beginning in September that ended in November, and a second sustained trend move developed from December.

This was a similar situation to what occurred during the first round of Quantitative Easing in 2009:

From the March 2009 low, price developed a sustained Positive Feedback Loop that propelled price from 666 to 950.

We can see a slight Negative Feedback Loop (consolidation) that developed in the middle of 2009 which gave-way also in August to another Positive Feedback Loop on the break to new recovery highs above 950 then 1,000.

Those who were short above these levels were forced to buy-back to cover, which emboldened more bulls to put on new positions or else add to existing positions in the context of a sustained, upward march higher.

One of the basic principles of Technical Analysis is that trends, once established, tend to have greater odds of continuing than of sudden reversals, which builds on the concept of Positive Feedback Loops.

Keep in mind that Feedback Loops occur on all timeframes as different traders interact with various trading tactics and strategies.

In general, it tips the odds to make it easier for traders to trade in the direction of feedback loops instead of against them.

Continue to study this topic for additional insights of how you can apply it to your own trading.

Here’s a few prior blog posts for more information on this concept and how to trade it:

• Quick Lesson from Intraday Creeper Trend Moves
• A Lesson from Creeper Intraday Trend Moves with Divergences
• July 11, 2011 “Making Sense of Current Range Behavior”
• Textbook Triangle Trade Example in Crude Oil (tactics)
• Higher Timeframes Lessons from the Breakout in Silver (Aug. 7, 2011)
• Popped Stops and History Repeating (during January 2011)
• Sep. 20, 2011 “SPX Breakout Trading Tips – Is this Really it?” (yes)
• Lessons from Failed Sell Signals and Popped Stops
• Opportunities from Popped Stops Intraday

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Plan your trip early to the always amazing New York Traders Expo which will take place February 19-22, 2012 – and as always, attendance is free!

Traders attend the New York Expo not just from all over the USA, but some traders fly in just for this Expo, so it really is a great place to learn new strategies and meet fellow traders and professionals all in one location.

Here is just a small sample of the many speakers you will be able to meet at the Expo:

I’m excited to be presenting a half-day intensive session on the first day of the Expo – Sunday, February 19th:

“Back to Basics:  How to Adapt Time-Tested Set-ups and Strategies to Today’s Markets” (direct link)

I’ll begin with foundational price principles on trend, momentum, and volatility and explain how those form the building blocks for retracement, breakout, and the ever-popular reversal-style trades.

We’ll then focus on how to identify, enter, manage, and of course exit these opportunities using examples from all the timeframes and many markets and stocks.

I’ll also present a twist on using multiple timeframes with my separate presentation Monday February 20th:

“Creating Trades from Two Timeframes:  Four Set-ups and Tactics”

We’ll discuss how to combine two timeframes together to confirm and trigger trades, while discussing how to avoid a common pitfall of viewing two timeframes.

And those are just the two presentations I’ll be giving – there will be dozens of other popular trading authors and speakers giving so many presentations during the Expo that you’ll have to make a schedule to attend as much as you possibly can!

Join trading legends John Murphy, Linda Raschke, Toni Turner, John Carter, Larry Williams, Lawrence McMillian, Scott Andrews, Tom DeMark,  and so many others who will be speaking at the Expo.

Beyond the speakers, there’s plenty of opportunities to speak with fellow traders (network!) and demo some of the new tools and software available to the trading community.

The Expo begins on a Sunday, so feel free to fly in on Friday and do some sightseeing on Saturday and be well-rested for your Expo experience during the week.

I’m looking forward to this Expo and hope you will be able to join us all in New York City!

Corey

While the daily chart argues for potential reversal higher, the weekly chart shows a barrier of overhead resistance that must be broken before a reversal higher can take place.

It’s a good example of how to incorporate two timeframes in real-time, so let’s take a look at AMZN:

Keeping the description focused on combining two timeframes, the Daily Chart shows the odds hinting at a possible upward bullish reversal.

This structure is due to a lengthy positive momentum divergence and the bullish reversal candle off $170 in late December.

Price then broke above both the falling 20 and 50 day EMAs accordingly (green arrows) yet fell shy of testing the 200d SMA and ’round number’ resistance at $200 per share.

In simple terms, Amazon would be seen as a buy for potential reversal on a firm breakthrough above $200 – initial targets would include $220 and higher in the context of “open air” above $200.

But not so fast!

Before we get excited from the bullish side, let’s look at a barrier overhead via the Weekly Chart:

The Weekly Chart suggests a different picture – or at least that we need to put the potential daily chart reversal in a larger context.

This is the type of discussion we’ll have in my upcoming live webinar on “Two-Timeframe Trading Tactics” with Mirus Futures on January 31st.

One of the topics will be how to put smaller timeframes in the context of larger timeframe levels or key points that you might otherwise miss on the lower frames.

Amazon gives us a good real-time example of this topic.

While the Daily Chart lays the foundation for a potential bullish reversal and break higher, the Weekly Chart makes the $195 to $200 level all the more important in terms of structure and trading expectations.

That’s because we see a breakdown in structure (trend) and both the 20 and 50 EMAs (indicator structure) on the Weekly Chart which gives us a confluence resistance barrier from $195 to $200.

Due to the confluence resistance – and seemingly bearish tone of the weekly chart – it makes any actual (real-time) break firmly above $200 all the more important in terms of a reversal of trend and structure to the bullish side.

Yet in the absence of any firm break above $200, we’ll be looking for the bigger picture’s bearish structure to weigh down (or invalidate) any lower timeframe early reversal signs we’re seeing.

Summing up as simple as possible, from an objective game-plan trading standpoint:

AMZN becomes very bullish structurally above $200; cautious to bearish under $200; and bearish for higher timeframe breakdown under the recent $170 swing low.

These can be used to develop short-term strategies as price trades around – or breaks through – these levels.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Let’s start with the 7 to 10-year Treasury Fund IEF:

Quick analysis shows us a lengthy (mature) uptrend that is undercut by lengthy negative divergences in both volume and momentum – not something you want to see if you’re bullish on bond prices.

There’s also a mini-Triple Top pattern (and internal divergences) into the critical $106 overhead resistance.

In short, that’s bearish for bond prices as it stands at this moment.

This week saw a sharp three-day reversal lower which now threatens to break the rising 50 day EMA at $104.50.

Let’s turn now to the similar landscape in the more popular (known) 20+ Treasury fund TLT:

We see a similar mature uptrend undercut by lengthy negative divergences into the key $122.50 overhead resistance level.

This is a closer look at what I was describing in the “Something’s Gotta Give” post:

Either “Risk-Off” assets such as bonds reverse lower from resistance, which suggests “Risk-On” assets like stocks break higher, or vice versa.

As of the last few days, the structure has tipped in favor of “Risk Off” assets beginning an early potential reversal, though we’ll need to see price break firmly under their respective rising daily trendlines and 50d EMAs where they stand now.

In other words, while we still could see a bounce higher in bond prices off the 50d EMA (reference early November 2011), further downside price action suggests a high probability for the “Risk-Off” Asset Reversal lower and “Risk-On” Asset Continuation higher thesis.

Though I don’t show it in a separate chart, the S&P 500 broke tentatively above 1,300 and closed the week at 1,320 on a seemingly hesitant (not compellingly impulsive) breakthrough.

The Dow Jones almost completed a full retest of its 2011 high which will be a critical ‘price resistance’ area to watch closely.

For a longer perspective on bond funds, let’s view the monthly structure for IEF:

A quick price-based look shows us a lengthy, overextended rally scraping above the upper Bollinger (volatility) Band near $105.

We can see historically how two similar overextended rallies ended – with a clean retracement back to the rising 20 month EMA (which was a buying opportunity).

So unless the structure changes dramatically with a sudden upsurge in bond prices – and yes that could happen – the simple chart-based odds seem to favor weakness for bond prices, particularly on a trigger under the daily chart trendlines and EMAs shown above.

Watch closely to see if indeed this outcome develops.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Let’s take a look at “What’s Going Wrong” from a classic Intermarket perspective which leads us to “What’s Gotta Give” in terms of a building reversal.

First, the closer perspective of five Cross-Market quick charts:

In terms of Cross-Market Analysis, it’s best to group the broad markets into four components:  Stocks/Equities, Bonds/Treasuries, Commodities, and Currencies.

This can be done in a number of ways using various Index symbols or popular ETFs.

From this, you can view various trends and then break each market down into individual components for clearer trading opportunities.

But for this post, I want to focus on the difference between “Risk-Off” Markets or defensive markets such as US Treasuries (Bonds) with the US Dollar Index and the “Risk-On” or offensive markets such as Commodities (Gold and Crude Oil above) and of course Stocks.

Risk-Off (defensive) and Risk-On (offensive) Markets tend to move opposite each other in terms of their trends… but that’s not what’s happening currently which warrants our attention.

In the line chart above, we see ALL markets (except for Gold) rising from the September or October lows to the current January highs.

In fact, these creeping uptrends leap off the charts at us, which brings us to the dilemma:

Why are all markets rising and what does it mean?

When will one or more of these markets reverse back to “normal?”

The answer is beyond the scope of this post but it merits further attention.

From a quick price perspective, here are the current resistance levels to watch:

• 1,300 for the S&P 500
• $103 for Crude Oil
• $1,700 for Gold
• 131 for 10-Year Notes
• 81.50 in the US Dollar Index

Would it be possible for all markets to break above their respective resistance levels?  Yes, anything could happen, but that would be the lower-probability (and some would say “very unlikely”) outcome.

The classical thinking would be that either the Risk-On markets fail to overcome resistance and reverse lower, boosting Risk-Off assets above their resistance, or vice versa (Risk-Off Markets boost higher, reversing Risk-On Markets).

Here’s a longer perspective Cross-Market Line Chart from 2011 to present:

Watch these markets, as well as larger perspectives/timeframes, in the context of classical “Risk-On” and “Risk-Off” parameters.

Mark Douglas in his popular book Trading in the Zone reminds us that “Anything Can Happen” in the markets, but given the critical resistance levels and creeper (divergent) rallies into respective resistance, one has to assume that “Something’s Gotta Give (reverse)” soon.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Let’s highlight a good example reference from today’s action on January 13th using the @ES Futures contract as our proxy.

Click for full-size image.

Without delving into too much detail of reversal logic, let’s just focus our attention on the price action along with two supporting indicators:

• The 3/10 MACD Oscillator – a Momentum Oscillator ( MACD with custom settings 3 and 10)
• The NYSE TICK – a Market Internal indicator

You could substitute any unbound momentum-style oscillator such as Rate of Change for your momentum indicator to get a similar effect.

What we’re identifying are divergences:

• A Positive Divergence occurs when price is declining (making lower lows) yet the oscillator forms higher lows
• A Negative Divergence similarly develops when price rises yet the oscillator forms lower highs.

Price can form single divergences or Multi-Swing (multiple) divergences.

Logically, the more divergences that develop within a swing, the greater the odds of the price reversing.

That’s the basis of using oscillator for confirmation/non-confirmation.

Today’s session gave us a cluster of both positive and negative DUAL divergences.

Dual Divergences occur when both the Momentum (price-based) and TICK (Market Internal) indicators form corresponding divergences relative to the price swing in motion.

The first major negative dual divergence occurred near 11:00am CST which was then triggered – for a potential trade entry – on the signal from price breaking either the rising trendline or preferably the horizontal trendline near 1,281.  The stop would go slightly above the prior swing high in the event the up-trend continued.

Similarly, there were two positive divergence situations near 11:40am and 12:45pm CST – the first divergence produced only a very small swing to the upside while the second opportunity did result in a swing reversal – and break of a sideways rectangle pattern – for larger swing higher.

Each trader must decide whether to use aggressive (entering early and using a wider relative stop to play for a larger target) or conservative (entering only after proof of a trendline break while using tighter stops and smaller targets) trading tactics when building trades out of this type of swing reversal logic.

Generally, the trade is exited either into a fixed target or on a corresponding opposite divergence… which may trigger a new trade.

Divergence situations like this can be used as trade exit signals (perhaps from another set-up), not just entry signals.

I’ll cover this topic, and incorporate divergence work into multiple timeframe analysis, at my presentation at the New York Traders Expo.

This is also the type of explanations and lessons we cover each day using the intraday timeframes to spot ideal trades, discuss what components created the set-up, how to manage it, and specific lessons to use for future opportunities in the Idealized Trades membership reports.

Always take time to study price and indicator behavior to learn additional insights so that you’ll recognize similar situations easier and be prepared to act to trade the classic set-ups.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Is the S&P 500 completing a short-term “Double Top” reversal pattern or an “Inverse Head and Shoulders” continuation pattern?

Let’s look at these developments and plot classic targets and expectations.

First, the bigger Daily Picture:

For distinction, I labeled the Double Top (“TT”) in black and the Inverse Head and Shoulders pattern in blue text.

It’s unusual to have two classic, textbook patterns competing for trader attention, and it’s even more interesting to have it happening at the critical “battle zone” of 1,300 which many traders agree to be a “Make or Break” for the market structure.

In other words, sellers draw the line at 1,300 and have placed stop-losses above 1,300 while buyers – if not already positioned – will likely enter new positions or else add to existing positions on a firm breakout above 1,300.

This is the same logic I described in my prior “January Market Structure” update last week.

Starting with the Double Top Reversal Pattern, we see two peaks into the 1,300 (technically 1,295) area and we note a clear negative divergence in both momentum and volume when compared to the October 28th peak (the origin of both these patterns).

To expect a Double Top pattern resolution, we would need to see continued FAILURE at 1,300, meaning an immediate move lower that targets 1,260, 1,240 and then moves towards the 1,160 level if not lower.  That’s the Bearish Pathway.

The Inverse Head and Shoulders Bullish Continuation Pattern triggers with a firm breakthrough above the “Neckline” at 1,295 (1,300 for easy math) which then projects a classical target to 1,430 (which is 130 plus 1,300 – the distance from the Neckline to the Head then added to the Neckline).

For reference, 1,430 gets us close to a longer-term upside target of the May 2008 (yes, that far back) high.

A pure-price pattern clarifies both of these competing patterns:

I’m keeping this post as simple as possible – feel free to add in your own analysis or interpretation of additional indicators and methods.

Sometimes it’s good to pull back the perspective to a “Price Purism” point of view, which is what I’m attempting to do here with a neutral bias, aware of either potential outcome.

Take a moment to look over these patterns, review classic targeting/expectations, and be ready to trade either outcome should we indeed see price confirm one of these patterns.

No matter how you define it, what happens at 1,300 will be very important to assessing future expectations.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!