S&P 500 Trading Range and Bear Traps

The S&P 500 – and general US Equities – have been mired in a two-months sideways trading range with clear upper and lower boundaries.

Though this week gave us a meanBear Trap,” price returned within the parameters of the persistent trading range.

Let’s update these levels and put this week’s ‘trap’ action in proper context:

Take a moment to read my post last week from October 3rd that detailed the ‘bigger picture’ of the trading range – this posts serves as a weekend update.

The main idea is that 1,220 serves as the “Upper/Expensive” Resistance Line while 1,120 serves as the “Lower/Cheap” Support Line.

#-ad_banner-#That makes the “Midpoint” or “Value Price” of the trading range consolidation (rectangle pattern) at 1,170.

These levels are ultimately all you need to know to develop short-term simple trading strategies (mainly for intraday or short-term swing traders).

The trades build off the premise “Expect price to remain within the confines – up and down – of the current trading range until we get a clean break and close outside a boundary level.”

No, last Tuesday’s intraday break under 1,120 does NOT count as a breakout for two main reasons:

First, price did not close under 1,120 or 1,100 – a close is necessary to confirm any breakout.

Second, price re-entered the “Lower Support” line and now trades – seemingly at resistance – at the Midpoint Price of 1,170.

We’ll officially define Tuesday’s action as a “Bear Trap” that gave a very clear caution signal on the way up.

It was fine and logical to short for a breakdown under 1,120 and 1,100 – many traders did – but when price RETURNED back into the Range Boundaries (breaking back above 1,120) it was time for sellers to take stop-losses and consider a “flip/reverse” position to play for a return to the Midpoint at 1,170.

Interestingly (or perversely, depending on your perspective), these ’stop-losses’ helped propel price higher towards the current 1,170 Midpoint (we call this a “Feedback Loop”).

You can see how price has reacted in the last two months with respect to these levels and the Midpoint Level at 1,170 – it’s roughly equidistant from the 1,220 upper target and 1,120 lower target.

In the week ahead, a departure above 1,170 suggests 1,220 will be realized, while a continuation of the intraday sell-leg that developed into Friday’s close (resistance at 1,170) suggests 1,120 will be retested.

Given the intraday divergences, it’s easier to visualize a return to 1,120 as the more likely or probable play, but try not to get overly biased either way.

Sometimes you need to take a step back and focus on Market Structure – the price highs and lows themselves – to get a clearer picture of what the next likely play will be.

“Bare” charts like these can help you do that for any stock or market.