By Scott Pluschau
www.scottpluschau.blogspot.com
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There is still strong demand at 1,395 on the Emini S&P 500 futures. Today was textbook "Responsive" price action. The Support area of the "Descending Triangle" held like a concrete floor, (see left hand side 30 min chart below), but each time a support or resistance level gets tested it gets weakened (some cracks). Why? In this example prior demand here has been reduced or perhaps even depleted.
Any trendline with three points of contact in a given degree of timeframe is significant, and a strong horizontal level such as this one sets up the "Initiative" type trade should this level break down with an increase in volume.
The triangle can now be seen on the daily chart, see right hand side below, and this drawing of the triangle with blue trendlines puts into context why it is important to correctly identify the phase of development in the larger degree timeframe. A failed breakdown against a bullish current is always a potent formula for a nasty short squeeze.
The big question now is whether or not this demand gets met again by increasing supply at lower prices, which has been represented by the downward sloping upper trendline of the triangle. There is no point in predicting.
What makes the descending triangle an important pricing pattern is due to the zero sum game of open interest in futures. All of the existing long positions that have been put on inside this triangle above 1,395 over the past nine trading days would be looking at a loss below 1,395 if they are holding on. Should they decide to sell, and it's only met with an increase in selling from short traders, and further long liquidation, it leads to vertical development. Down she may go to a prior value area or levels of support or until the losing traders have been flushed out.
Nothing is guaranteed in chart or auction market analysis. Supply and demand can always change in a heartbeat based on any number of catalysts. Chart patterns can disappear or morph into new ones, but to me it is about probabilities, matched up with good risk management, money management, trade management and position sizing.
In the meantime I sit back and wait. Not trading is speculating. A breakout above the upper trendline resistance puts any short trading on hold again and long trade setups back in the arsenal.
(Click on chart below)
I mentioned in my previou post on the S&P 500 that this chart is one to keep an eye on and it can be found here: http://scottpluschau.blogspot.com/2012/09/chart-to-keep-eye-on-s-500.html
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Source: Significant near term trendlines on the S&P 500
