Expecting Consolidation...

This weekend I spent some time doing regressional analysis on the S&P. I focused on the price action during the last 100 sessions. What I find is that the first 2/3 of the price action congested between 820 and 960. The 30 or so sessions saw a fairly sharp linear rise from 880 to 1039 - with very little new congestion above 960. I also see a major NEGATIVE divergence in the Advance Decline line across the final rally leg. These conditions favor pullback/consolidation.

Looking at my 20 day 60 minute chart - I see a trading range between 1018 and 1039. We are smack in the middle of that range now, with volatility increasing. Perhaps we are in a topping process; perhaps we are resting allowing momentum to build again for another break-out rally.

Finally, I noted on my 15 minute chart that we are caught in what I call a "price gravity band" (the subject of a paper that I am authoring for later publication). Interestingly enough, my analysis suggests that there is more money to be made below the current gravity band than there is above it - however, we are slighlt above the center of the band now with fewer resistance levels than support levels - which could support a breakout. Regardless, price awaits a catalyst inorder to escape this band (in either direction).

My long play setup is based on a break of above 1033 to test 1039. I would get in quickly on the break - watch for a pause at 1035 and then a forceful move from there to a test of 1039. There are 6 points in that move alone. If we break 1039 I would put a trailing stop on through the surge. You will get stopped - however, it is not uncommon for the price action to come down to the breakout level and do a bounce. Either way, a break above 1039 signals another rally leg and could get us to that 1061 level I spoke about last week.

The short play setup is based on a breakdown below 1023 to test support at 1018. This represents only a 5 point move, but tehnicals are weak right now and a test at 1018 has a high chance of failure. Failure to support at that level could lead to a more dramatic downside move. It is pretty soft all the way down to 1007 and true support doesn't kick in until the 1002 level.

I have decided not to publish my charts as part of this entry. I am experimenting with new applications of classic techniques and I am not sure what the results may bring. I would like to see these levels play and continue testing the approach in future sessions. If it looks good, I start to elaborate more and publish the associated charts.

Good luck trading this week!