On Sunday night, I noted that the market was in a critical position and — despite the general bullishness of the season, would likely fall because of the relative weakness seen in the Nasdaq futures market (click to see this post). So far this week, we have seen the market slide lower on down trending days. The question now becomes, where might it fall to?
Well, no one knows that one for sure, of course. But we can look at market structure for a clue. In the accompanying daily chart, I have highlighted an area with a yellow band. With a careful look, you can see that since August, the market has traded around and sometimes through this band several times.
It visited this this area twice in August and three times in September. It spent nine days trading in it during the early part of October, and returned to the top of the area later that month. In November, the market went down through the area, quickly turned, and rallied back up through it. Now, in December, we approach it once more.
The area is approximately from 1200 to 1180, or perhaps a little wider on the upside. The exact size is less important than the fact the market has been trading around this area for nearly five months. Although it can continue to rotate around the area for another several months or more, how it reacts to this level will give an indication of what it will do next.
Driving through the area would not be constructive for this market. A further push down and through the 1180 level could see lower prices in the weeks ahead. A more constructive outcome would be a quick dip into the area and a rapid turnaround to the upside. In this instance, we would expect higher prices up into the 1300 level and perhaps beyond.
As Wyckoff once said, “The study of responses is an almost unerring guide to the technical condition of the market.” Here is an area we can watch carefully to see the market’s response.
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