Here we are again, testing the key 1,130 target overhead resistance level for
the third time in the last three months.
The simple question is Will resistance hold or will it break? and of course
you can get a lot more complex than that, but I strongly advocate you think in
those terms as simply as possible and plan for a scenario to trade if
resistance breaks or if resistance holds. That way you wont be caught off
guard.
Lets see what I mean:
First of all, there is a dominant chart pattern where history has now
officially repeated three times.
I originally discussed this pattern and now we have the expected/successful
outcome of that pattern in my September 2nd post:
Third
Times the Charm? The S&P 500 Daily Rally Pattern.
Now weve completed the Third Times a Charm rally back off 1,040 into the
overhead resistance at 1,130 the target and now we play the Will it or
wont it game again.
There are two scenarios:
1. IF History Repeats
If history repeats, THEN we will see a halt of the market rally here and a
turn back down in a sell-swing that could take the market all the way back to
1,040 in a similar fashion as the sell-swings in June and August.
2. IF Price Breaks Out
If the Third Times a Charm results in the market actually breaking upwards
above the key 1,130 resistance level, THEN you can expect this market to surge
potentially very violently in a vicious short-squeeze back to the overhead
price target of 1,170 or even as high as 1,200 or beyond.
Yes, no matter what you believe, think, or what the charts are showing, the
S&P 500 could indeed rally to a new 2010 high within the next few
months.
Its like the Mark Douglas principle: The market can do anything and if
you turn a blind eye to the bullish action because you believe it absolutely
cant happen, then you will first miss an opportunity to trade a breakout play
long, and second, more unfortunately, you WILL lose money if you fight this
market by shorting it as it breaks out IF it breaks out.
If history repeats as everyone thinks it will, then you short the move and
make money as price falls. Simple.
But if you get caught up in your believe that the market HAS to fall and then
the market breaks out above 1,130 and travels to 1,170 and perhaps to 1,200,
then your inability to plan for that possibility in your analysis and trading
could leave you devastated.
Remember, no one knows with 100% certainty what is going to happen next and
as traders, its our job to PLAN for possibilities and then trade them when we
get triggers or entry/exit signals.
Scenario 1 or 2 will happen resistance WILL break or it WILL hold.
It cant be both.
Be ready.
Corey Rosenbloom, CMT
Afraid to
Trade.com
