What’s inside:
- Big resistance cleared in the S&P 500
- Old resistance becomes new support
- Buying dips versus breakouts
Big resistance cleared
Friday saw the markets blast on higher, with the S&P 500 decisively closing the week above a major resistance zone (1990/2010). As we have been discussing regularly the participation in this rally and shunning of overbought conditions bodes well when looking out over the course of weeks. There is more meat on the bones of this rally than the one which took place during the fall of last year.
With that said, we don’t find the next significant resistance until the S&P 500 gathers itself towards the 2100 area. For the Dow, similarly, the targeted area is between 17700 and 18000. The lagging Nasdaq 100 is looking for a move towards 4500 before likely finding supply. It would make sense that at the least we can expect those upper levels to be met before seeing a meaningful decline, again, given the current health of the rally.
Old resistance becomes new support
Since the S&P 500 closed both the day and week above the upper bounds of the resistance zone we had pegged between 1990 and 2010, we will now look to that as support. Ideally, we see a dip back into that area for a potential entry from the long-side. However, it is possible the market doesn’t pull back much from here and begins an upward grind towards those upper levels.
What would turn the current state of affairs bearish? At this time, we would really need a push back below the bottom of the new support zone at 1990, and ultimately below 1970 to bring about serious consideration the market is not as healthy as it currently appears.
S&P 500 Daily
Buying dips versus breakouts
The preferred approach on this end for indices, especially, is to buy dips and sell rips. Indices tend not to exhibit a high degree of ‘autocorrelation’ in their price behavior, which is just a fancy way of saying they have a lot of overlap in price action. This makes buying breakouts a bit riskier than say doing so in the FX markets, which is an asset class is known for exhibiting more consistent momentum, although that even varies depending on the pair.
At any rate, taking a patient approach and waiting for dips which begin to turn back higher over time offers better risk/reward entries than chasing momentum following a breakout.
---Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter @PaulRobinsonFX, or email him directly at instructor@dailyfx.com.
