Our One Market Chart Revisited — With A Change In Market Tone, by D. R. Barton, Jr.

Barton TT1Two weeks ago, we looked at a market chart that contained the so many key concepts that we spent a whole “Trading Tip” on it. Welcome to déjà vu…

This is one of those times that market action lays out such clear support and resistance levels that we can’t help but to sit up and take notice.

After the market did a fairly unusual hard “V” bottom off of the lows from Christmas Eve and Boxing Day, it rocketed up. And I mean rocketed up. In the 17 trading days after Christmas Eve, the market (based on the broad S&P 500) closed higher than it opened 15 times and closed higher than the day before 14 times. That’s a rip to the upside. And, very importantly, the market also pushed through the important 2,600 level that we look at two weeks ago. Let’s dig into that very telling chart again and see what the numbers are telling us:

926 DR chart1

  1. After testing 2,600 for four trading days, the market broke through the key resistance level set out by the lows in October, November and December. More importantly, the price action has been 100% above that level in the following five days (and barring a big flush down on Wednesday afternoon, should remain so). You’ll recall that I often remind us about a key fact on support and resistance — when price cuts right through one of these key levels (meaning no bouncing back and forth above and below), it signals that the level was, in fact, important. Once defeated, key resistance becomes support. In this particular case, we haven’t moved high enough above the level for the bulls to declare victory just yet, but this is a very good start.
  2. Now that the market is in the process of putting 2,600 in the rear-view mirror, the zone from 2,800 — 2,815 now looms large as the next resistance level. In fact, it should draw price like a magnet, though with the turbulent news-driven price action, it could take a bit of doing for the market to reach up and test that next important resistance level.
  3. The short-term support level that was put in on Jan 3rd — and we drew this line in for the first time a couple of weeks ago. Because of the price action, this area has now solidified itself as a more important level. A break below 2,600 that holds above 2,450 will serve as a springboard for the bulls.
    Of course, the real downside test is still at the Christmas Eve / Boxing Day lows. But with that level now 10.6% below where price is trading at midday on Wednesday, it would take a fairly precipitous drop to get us back there any time soon.
  4. Importantly, short-term volatility continues to shrivel — a sign that the bulls are in control for now. As you can see at the red 5 on the chart above, we’ve dropped down to the lowest volatility levels we’ve seen since early October.
  5. The Tuesday/Wednesday down days of this week have pushed us back down closer the 2,600 level that now serves as support. If the market can’t penetrate this level in a megful way over the next few days, we are set-up for the market to melt up to the 2,800 — 2,815 level.
  6. As I said in the title, this break above 2,600 has changed the tone of the market. Earnings season, which is in full swing, will give us some good information on how individual companies are seeing the economic outlook and the aggregation of that info will give us some guidance for post-Brexist-tariff war expectations. For now, we’ll pivot to less caution in a short-term optimistic trading stance.

Your thoughts and comments are always welcome — please send them to drbarton “at” vantharp.com

Great trading and God bless you,
D. R.

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