S&P500 Back Down to Pre-Breakout Level: Price Action Comments

S&P500 Falls Back

After one and half weeks of very narrow range sideways action near the high, the S&P500 index has fallen back to its previous resistance from 7-13 September.

S&P500 (September 2012)

This recent situation nicely demonstrates some typical characteristics of price action:

1) If price has gone through a particular price range very quickly without corrections and without having spent too much time in that range (such as 1440-1450 on S&P500 on 13 September), it often goes through the same range very quickly also on the way back (25 September). This works particularly well if the market is in an “uncharted” territory and therefore has no other support and resistance levels and other price “memory points” in that range (it has never traded on the price levels before or only very long time ago – in our current case S&P500 had not been above 1440 since January 2008).

2) Previous resistance levels are likely to act as new support levels on the way back (and previous support as new resistance in the opposite direction). The market often rebounds on the support (previous resistance) and returns up again to retest the highs. In the current situation, it would mean that S&P500 rebounds in the 1430-1440 area and goes up to retest the 1460’s-1470’s in the coming days or weeks. However, of course, very often it does not and the support is not enough to stop the market from further declines (after all, the technicals are only one of the many factors influencing the markets at a moment). So, as always: no predictions, just different scenarios.

This is how the situations looks on the other two major US indices:

Dow Jones

Dow Jones Industrial Average (September 2012)

The Dow Jones Industrial Average has looked a bit stronger than S&P500 recently. Unlike S&P500 it was able to get very close to the intraday high again on Friday 21 September open (it has not exceeded it though). Now, after yesterday’s and today’s decline, it is still some 40-50 points above the previous pre-breakout level. Also note that on the Dow the pre-breakout zone of 7-13 September was actually upward sloping a little, while on the S&P500 it was more sideways.

NASDAQ

NASDAQ Composite (September 2012)

NASDAQ Composite, on the other hand, has been the weakest of the three indices in the current down move, although before it briefly got above the previous high at 21 September open. This morning it has got even to the pre-breakout level of one more week before (4-5 September), although unlike the other two indices it managed to close well off the intraday lows today. It had also been much weaker in the already mentioned congestion area between 7 and 13 September, when it actually lost 1-2%.

The price action in August, namely the 3100 high on 21 August, has been one of the factors in all this NASDAQ price action (the green line on the chart below).

NASDAQ Composite (August-September 2012)