Bullish Strength Building in these Three Indices

I’m assuming most traders were surprised at the recent power-rally in the US Equity Markets recently.

However, taken into the larger context or perspective, this rally formed off major “Make or Break” Confluence Support as best seen on the Weekly Chart.

What started as a simple “retracement” buy-in has ignited a powerful “Positive Feedback Loop” that morphed into a powerful Short-Squeeze.

Here – let’s take a moment to see the three major US Equity Indexes on their Weekly Frame:

Starting with the S&P 500, we’ve been noting the absolutely critical “Make or Break” support at the 1,250 area.

It was the rising 50 week EMA and the 200 day SMA along with a prior price low from March 2011.

The common theme you’ll see is that the structure is similar in all three equity indexes and buyers successfully capitalized off the expected support.

Now, we’re in striking distance from making new recovery highs in all three indexes.

In fact, if you’re looking for historical precedent, look to January 2010 at the end of QE1.

We had a sharp downside retracement into the rising 50 week EMA at 1,050 which then resulted in an extremely violent feedback loop of buying pressure that resulted in a 170 point rally (to 1,220) into the May “Flash Crash” period.

Similarly, QE2 ended in June 2011 and we had a similar retracement to the rising 50w EMA.

There’s of course no guarantee history will repeat with a rally, but there certainty is historical precedent for a pattern repeat.

Let’s move now to the Dow Jones Weekly Index:

We see the same strong rally off confluence support from the 11,500/11,700 region.  Compare this structural similarly also to January 2010 both in terms of the rising 50w EMA test and doji reversal candle.

The recent breakthrough above 12,500 is a bullish development/victory.

Finally, here is the similar structure in the NASDAQ:

The 2,600 level proved to be confluence/powerful support to the market.  As of this post, the NASDAQ is 20 points away from a new recovery high.

Technically, the NASDAQ would be making a new high not seen since December 2000 should we see a new recovery high beyond the 2011 peak at 2,887 (2,900 for an easy reference).

#-ad_banner-#As was the case/example in 2010, any further push to new recovery highs in the Big Three Equity Indexes should be expected to ignite another “Feedback Loop” of buying pressure that impulsively takes equity prices higher.

To recap, a Feedback Loop generally begins either when a market rallies sharply off confluence support or when a market breaks a known resistance level.

What happens initially is that short-sellers (bears) rush to lock-in profits in the case of a rally off support (like recently) or to stop the losses (their stops are triggered) in the case of a breakthrough beyond expected resistance.

In both cases, the rally off support or the breakthrough to new highs triggers sidelined buyers to enter new long positions on a rally off support or perhaps add to existing positions (or add a new position) on the breakthrough to new highs.

The logic of a “Feedback Loop” is thus the following:

Bulls buy, Bears Buy to cover, More Bulls Buy as price rises, More Bears Buy as price rises, and so on.

That’s what triggered on the bounce off confluence support in June which now threatens to ignite another feedback loop of buying on a firm breakthrough to new recovery highs.

As we move into potential resistance from the respective 2011 index highs, watch price behavior and be prepared for another potential feedback loop should buyers ignite one on a breakthrough to new recovery highs.