Midweek Glance of the SP500 May 20

May 20, 2009

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Midweek Glance of the SP500 May 20

Courtesy of Corey at Afraid to Trade

With Wednesday being the midpoint of the week, let’s take a look at the current structure of the S&P 500 Index from a technical perspective to see where we are and where we might be heading.

We see the power of the swing-up (which is still classified as a “counter-trend” move up in the context of a pervasive downtrend) which has taken price up to the 940 level to challenge the January high just above 940.

The 940 area will be the critical zone to watch in the coming days – look closely and you’ll also see that the falling 200 day SMA resides at this level as does the upper Bollinger band and price resistance from the January highs – that makes three simple forces of confluence resistance. It will be a major test for the bulls to overcome and it might be better to await the resolution of this battle (of supply and demand) rather than trying to ‘predict’ which side will win.

If not, then we see support from the rising 20 day EMA at the 890 to 900 level, so notice that support (via moving averages) is rising and resistance is constant. One of these two forces will break – join the side that wins instead of trying to be a hero and predict which side will win.

Even so, for whatever your opinion, the stop-loss levels are clear (above 940 for shorts and beneath 880/preferably 860 for longs) and the targets are larger than the stops provided you get the continuation move you expect.

Other technical factors to watch include the negative momentum divergence which has been forming since April (’momentum’ tends to show false divergences during a strong, sustained move) and the volume divergence and decline off the current three-day rally.

According to Mark Douglas (Trading in the Zone), it’s best to note key technical levels which will provide inflection points and then wait to see who emerges victorious and then join that side. We see such an inflection point at the 940 level (if bulls can push it there). We might do well to heed his advice.