Tuesday, December 21, 2010

SP500 At Resistance

The SP500 has neared resistance at 1256.98 at the March 21, 2008 low with a high today of 1255.82.  However, this is an area of weak resistance.  I define weak resistance as a previous swing low that has been penetrated by a subsequent swing high.  Strong resistance is a previous swing low that has not been penetrated.  The July 15, 2008 low of 1200.44 was a level of strong resistance.  Price did not penetrate that level again after closing below it on the weekly chart in 2008.  We can see that this was a strong resistance level in the price action this year as it has taken 3 attempts for the market to successfully move above 1200.44.  We should say successfully so far, as a failure to hold support at that level now would likely be viewed as a major failure.

When the market hits an area of weak support or resistance it is unlikely to hold that level.  We can see that once the SP500 failed to hold support at the 5/12/06 high of 1326.70 for the third time in 2008, the previous levels of weak support from the 2002 to 2007 rally gave way rather easily which partly explains the severity of the crash that occured in 2008.

I have pointed out the likelihood for an intermediate to long term top at the current time window.  Should the market top in this area, there is weak support at 1219.80 and 1200.44 and strong support at the August high at 1129.24.  The previous July low of 1010.91 is an area of weak support.  While double bottoms are common, a low that occurs well above a previous support zone creates a level of weak support.  The next lower level of strong support is the 6/12/09 high of 956.23.

Based on the above, I expect that a top that occurs now would likely try to hold the 1200 to 1220 zone.  If that zone fails, the 1100 to 1130 zone would probably halt the decline at least for a sizeable countertrend rally.  If the 1100 to 1130 zone holds, then a new base should form to propel the SP500 back to the vicinity of its previous all time highs.  If that zone fails, I would expect a retest of 950 to 1000 to follow before another rally could materialize.

The one thing to really keep an eye on here is if the 1256.98 level is taken out, there is little to stop the SP500 from racing ahead to its all time highs as there are no strong resistance levels remaining.

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