andywd82 (95.01)

The S&P 500 July low is 1007, will it hold?

August 24, 2010 – Comments (0) | RELATED TICKERS: ^GSPC

As I write this, stocks are on sale (compared to yesterday's prices). They are, however, not on sale when compared to the low of last month, which was 1007 on the S&P 500, aproximately 50 points below the current price. Those that were trading in 2008 remember when the S&P 500 would regularly lose or gain more than 50 points in a day, and it could happen again,  so it's worth putting this price on your radar.

Of course, we may reverse here and press on up to the top of this month's range, and if that looks likely, i'll probably do a blog post about it. For right now though i will take a look at the down side.

As a trader, i'm not concerned weather we go up or down. I am concered with how the market acts as we do travel one way or the other. I draw your attention back to the title of this blog post. If the next major low is tested, will it hold? Of course, there are three options. It will either break that level to fresh lows convincingly, or it will reverse convincingly to the upside, or it will get stuck around that level.

Should we see a test of the low this week, i would need to see a convincing rebound straight back to a weekly close in the 1050's (at least) to be comfortable about being long. If we see a knife cut through 1007 to new lows, I will not be long at all until we reverse back above an equally obvious high. If i see a knife cut through, then fresh lows, then a quick rally back up above 1007, I will assume we are weak and heading lower, and i will assume that the short trade is crowded. This will cause me to look for that rally to run out of gas at which point I will go short or look for bearish bets. I will change my mind and be bullish again if we get above this weeks high.

If none of these levels provide clues, or they provide too many clues and 'whipsaw' me around, I will throw up a simple trend line or trend channel on the daily chart, for additional guidance. If an up-trendline is broken, I will ask myself the same type of questions. How did the market act as it broke the trend line? Vicious and hard in favour of the break? I will bet in that direction (short). Did it quickly stop falling just outside the trendline, or even reverse back up into the channel? I won't bet in favour of the trendline break, or I may even bet in favour of the (now broken) trendline (ie go long). If that happens, I will probably delete the trend line that was violated and draw another with the recent and slighly lower low.

I tell you all this to illustrate how I will be thinking as things play out. I watch levels, I watch trend lines, I watch the market action, and I base my trades on what i see. I'm sure you have your own conditions to trade, and your own viewpoint of the market from where you sit comfortably. It is worth thinking ahead when it comes to these chart points, to avoid getting distracted as and when something happens around them.

It is easy to follow today's big DOW 10,000 number, but that is for amateurs. Pro's watch the major highs and lows, and the trend lines, not the big round numbers. I hope this helps.