Bull Trap Up Ahead

The next few days are the equivalent of a Matador enticing a bull with a red flag. The bulls will chase this rally just to realize there is nothing behind the red flag. In other words, I think this is going to be a one or two day rally that will fizzle before we reach the recent S&P 500 swing high of 932. If for some reason we do break that 932 level, then the bears are toast for a while. The likelihood of that happening is slim.

I am going to share with you this single daily chart of the S&P 500 with support/resistance levels and fibonacci retracements. If there is one chart you should pay attention to, it is this one. I have labeled the support and resistances with horizontal green/red lines and the fibonacci levels are labeled with horizontal blue lines. Let's first take a look at the supports and resistances.

The key support levels below the current close of 879.56 are at: 875, 825, 804, 741, and 666. The fact that we closed above the 875 support level today is bullish, but likely only temporary. As I said before, this 875 level is a stubborn support area that will not be broken easily. We could still get another small bounce after this upcoming 1-2 day rally from this level. In any case, once this level is broken the next target area of 825 is where I think there will be a significant pause or possible reversal (see my post from yesterday).

The other element to look at on this chart is the fibonacci retracement levels. Typically, after a significant rally, markets take a breather. The retracement levels that are considered to be within the normal range are between 38.2% and 50%. These levels for the S&P 500 are: 846 and 812, respectively. So, any retracement back to the 812 area will still be healthy for the markets for the longer term investor. If we break below this level, then the 741 area becomes a real possibility.

Game plan: the next few days rally will be touted by the bulls as continuation of the march uptrend and by the bears as a corrective first move before a longer leg down. Prior to the close today, the short-term reverted back to UP. I will be watching for the short-term trend to reverse back to the downside. If this reversal occurs prior to breaking 932, then I will short heavily. If a break of 932 occurs prior to the short-term trend reversal to the downside, then shorting the markets is not what you want to do. I am convinced that we will see more downside before we break the 932 level on this leg up. I can taste the honey.

See you tomorrow.