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Know Your Levels

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We stress the importance of understanding levels of risk. That is, support and resistance. Knowing where your risk lies helps in not only determining market direction, but also...well... managing that risk.

In the big index we saw yet another important observation this morning at resistance. Of course I'm talking about the S&P 500 (SPX.X). Today's test up at the 1170 area marked the eighth observation at the level. How you come about the 1170 level as resistance will probably depend on your tools and style. Some may simply refer to the prior four or five observations and conclude that the 1170 level must be resistance for the SPX's inability to advance above that level. Others might employ the use of a friendly risk management tool, the one we use here known as a retracement bracket. At least that's what I've done.

Two points I'm using on the SPX are anchored first at last May's highs up around the 1315 area and the low hit on September 21 down at the 940 area. What's interesting about this bracket is that it yields a 61.8 percent retracement level right at 1170.

(The 61.8 percent retracement level is significant in my mind because in its fraction form the number is also known as the golden mean: 0.618. In my opinion, the 61.8 and 50 percent retracement levels are the most important within a bracket, the latter of which due to its psychological significance.)

SPX At Risk Level

Until the SPX breaks out above the 1170 level, I would consider risk in the market shifted to the downside. That's not necessarily a bearish stance. In fact, some S&P components are showing clear signs of bullishness even though the mother index isn't breaking out. Still, the risk to the downside out weighs the reward, in my mind, until the 1170 is clearly broken. To the downside, I define the downside by the next progression of risk, which happens to be at the 50 percent retracement level at 1126, or thereabouts. If the SPX were to breakout above the 1170 level, however, that risk would shift to the upside up to the next progression of risk, which sits at the 1244 area, or the 80.9 percent retracement level.

Where would a breakout occur in the SPX? In my opinion, that breakout would come on a print at 1180. By fine tuning my view of the SPX on its Point and Figure chart, I can define triple top resistance at 1170. Using the 10 Point Box, my breakout point is defined by 1180, which would shift the next resistance up around 1220, or about 20 points away from the retracement level on the bar chart.

SPX Triple Top

Another Take

Leigh Stevens, our new Market Strategist, has a similar take on the current risk parameters in the SPX, although there are subtle differences in his opinion. Here's what Leigh posted in the Market Monitor earlier today.

Contributed by Leigh Stevens

SPX Key resistance [at] 1172, which may be top end of trading range. Depends, as they may still take it through this area, without a further, deeper, pullback. Next resistance - 1183, then 1195-1200. If there was a breakout here key to sustaining rally is ability of SPX to hold 1170-1175 on a subsequent pullback. Resistance often "becomes" support, which is a well-known technical principle. Near support - 1160 area. Next support in 1150 area. This is more key. If this area gives way, some support may be found at 1145 area, but major support zone will be around 1135, down to 1123-1125. Still like the long side and it would be "ideal" if there was good sized correction and market got a bit oversold again. But the market may not make it so "easy" as there is often a hard choice about chasing strength.

Eric Utley
Option Investor

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