Resistance Holds

A Third Attempt To Set A Bull Trap

The Bottom Line

With the loss of upward momentum, the S&P 500 and NASDAQ increasingly appear vulnerable for more consolidation. Not only through time and corrective rotation, as we have already seen since November, but through price at the index level, too.

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The Price Action

Another positive start to last week was sold off with another three-day losing streak.

Friday’s unimpressive, indecisive bounce was not of much help.

The third breakout attempt has failed, along with continued loss of upward momentum. A new attempt to set a bull trap and roll it over is now underway.

A new reversal pattern has formed within this year’s relatively tight, but increasingly more volatile, 222-point trading range between January’s high and February’s low.

If this bull trap proves successful, it would roll prices down to 6558. That level sits just above the prior November low at 6521, roughly -6% from the January high.

Two unfilled opening gaps at 6720 and 6602 would be in play on the way down, too.

The NASDAQ 100 has a similar price structure as it attempts to hold above its 150-day moving average, with its 200-day climbing above November’s intraday low.

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Long-Term Moving Averages

Tight consolidation through time and corrective rotation in a long-term uptrend is bullish until proven otherwise.

The sellers still have the burden to prove they are gaining control. That means taking out this month’s lows and sustaining movement below the 100-day moving average, as they did a year ago in the S&P 500.

It is not lost on market participants what transpired a year ago, which is why there is so much anxiety over this loss of momentum.

So far, this tight consolidation, more through time than price, has been enough to pull up the 150-day and 200-day moving averages and bring them back into play.

In an uptrend, the prevailing presumption is that the 200-day will likely be defended if and when tested. Patient, longer-term investors who deploy passive strategies often look for those tests as opportunities to buy favored stocks at more attractive entries.

All things considered, it may be far more constructive to see weakness before strength. That would clear out weak holders and trailing stops and allow for a stronger price reset, rather than relying mostly on time, internal rotation, and rolling corrections as we’ve already seen.

Throughout this bull market, we’ve seen numerous attempts to roll the market over and set bull traps. Each time, an initial break lower failed to gain traction, resulting in a breakout that continued the uptrend instead. We have the potential to see it again.

Something this prediction model, based on the past 5+ year price action, suggests is a potential scenario in the month ahead: