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S & P - How Is The Next Key. Strong Or Weak Rally Will Tell

Wednesday Evening  23 February 2011

  The S&P is starting to show some important information, either
in continuation upside, or with growing likeliness, a turn in direction. 
We have been showing the demand trendline over the last few
charts, and price stopped right at that support, 1297.50.  A support
zone between 1300 and 1291 is also presented to show that
support is really an area and not an absolute number.

 A reaction rally is likely tomorrow, and possibly Friday.  The tell
on that expectation comes from the bar range on Wednesday and
the volume that accompanied it.  Wednesday's volume was still very
high, but note the size of the range.  It was much smaller, and what
that says is that buyers were at the lower price level to keep the
decline from going lower.  Also, the net downside progress lessened,
which is another expression of buyers supporting the market.

 There is a qualitative difference between this decline and the
previous one at the end of January, which lasted two days before
the rally went to new highs.  Note the position of the close on the
second day, the last bar in January.  It was high end, and it closed
above the previous day.  Wednesday's close, by comparison, was
under mid-range of the bar, lower than the previous day, and also 
under the previous day's low.  These are signs of weakness, and it
is why we look for a weak rally to follow.  The next chart shows a
potential resistance.

 S&P D 23 Feb 11

 There was overnight support at 1320 on the 22nd.  Later, in the
day session, price broke through it.  In the next day evening session,
price rallied and failed right at broken support.  We added a second
line to show a zone of resistance, and that is 1323, the high of the
bar that broke resistance on the 22nd.

 Here is where the HOW of a retest provides important information. 
If a retest of that area occurs on wide range bars and increased
volume, that resistance will not hold.  If the ranges are small, the
rally labored, and less than average volume, that will tell us that
demand is absent.  We can expect the low of 1297.50 to give way. 
The next lower support would be the 1260 area, where price
stopped on the 31st of January.

 This week's two highest volume bars, since July, and the resulting
weakness described, indicates the probability of lower prices is now
greater than that of higher prices.  What this does is put the market
into a context from which a position can be taken.  It is now just a
matter of letting price unfold and determining the quality of price
movement in order to take the appropriate action.

S&P 30m 23 Feb 11