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Important Technical Levels Lining Up

Posted on March 19, 2009 by Adam

The market is poised for some interesting price action after spending two days near some very important technical levels. I view this area as being very important because I see three different technical indicators all converging on the same spot.

Yesterday the market topped out at S&P 800, which it tested again this morning. 800 will be an important level during this market phase, simply because it is such a significant round number. Traders will be looking at 800 to provide resistance over the next few sessions. We’ve now tested and rejected the level twice, but the more we test the 800 level, the more likely a breakout becomes.

I’ve also noticed that 50-day moving averages are becoming actionable in a lot of stocks. I don’t normally trade with moving averages, and I’ll never use them as a basis for taking a trade, but at the moment, I get the sense that big market participants are paying close attention to this indicator. Interestingly enough, the S&P 500 traded right up, almost exactly, to its 50-day moving average. What a peculiar place to stop. Over the past six months, the market has tested its 50-day moving average only twice before yesterday’s rally. We have spent essentially no time above it. I think a clean break above the 50-day will help to propel stocks higher, but until then, it will act as another source of resistance.

The third piece of the technical puzzle is the mysterious Fibonacci retracement. I’ve always been skeptical of Fibonacci trading techniques, but I can’t ignore how remarkably accurate they have been lately. In any event, I know that institutional traders are watching Fibonacci retracement brackets, and whenever they decide to watch something, it automatically becomes important, owing to the fact that they control so much money.

Fibonacci retracements are based on the work of a brilliant Italian mathematician, who discovered the golden ratio. His work is quite beautiful and elegant, and I suggest you read up on Fibonacci, even if you’re not into that sort of stuff. It’s enlightening, to say the least.

All that aside, it will suffice to say that traders apply his theories to price action in financial markets. Fibonacci retracement brackets work by looking at how prices move between significant highs and lows. There are certain “Fibonacci levels,” that for some crazy reason seem to work unbelievably well as support and resistance.

The reason I mention this is that the S&P is currently sitting at the underside of a Fibonacci level, which should act as more resistance. Of course, Fibonacci retracements depend on what you select as significant highs and lows. I have tried several variations for the highs and lows of my retracement brackets, and no matter which ones I use, Fibonacci always predicts resistance! Spooky, huh.

Alone, each of these three technical indicatiors would cause me to pay attention, but when you pile all three together at the same price, I really pay attention. The market is making it quite clear to expect a good deal of resistance at the 800 level, given the convergence of the psychological implications of 800, the 50-day moving average, and Fibonacci.

I’m not saying you should get bearish here. In fact, we could see an enormous rally if we manage to break these levels. But in the short term, look for a continued pullback. According to the retracement brackets I have constructed, we could pull back as far as 775 before I get concerned, and 750 before I switch my sentiment from bullish to bearish.