Knock Knock Knocking on Fibonacci’s Door SP500

nanosensor

Dec 23, 2009: 12:05 PM CST

To quote an old song by Bob Dylan, the S&P 500 is “Knock, Knock, Knocking on Fibonacci’s Door,” … meaning the intraday S&P 500 keeps bumping against this critical level of resistance that marks a key turning point between Bull and Bear.

Let’s take a closer look.



This is the 30min S&P 500 intraday chart (with 20 and 50 period EMAs) with the 1,121 level marked on the chart.  We touched this level intraday this morning and seem to be making a mid-day attempt to test this level again.

All eyes are watching this level very closely - or at least they should be.

Sellers expect price to turn down and fall from these levels while buyers expect price to ignore the level and break above it.

Because this level is considered a key boundary line, there are many orders both above (buy orders to get long combined with stop-losses to buy to cover from the sellers) and beneath the line (from short-sellers waiting to enter short, and from those who are already long and will need to stop-out).

This creates a “push/pull” environment with traders eagerly (anxiously?) awaiting to put on or take off a position at these levels.  The resolution could be violent in either direction.

A break above the level would initially start to enter the “pocket of stops” from the short-sellers and could immediately lead to a quick ’short-squeeze.’  Don’t get caught short in that.

Remember, a good deal of technical analysis and trading is ’self-fulfilling,’ meaning as more people watch and discuss these levels, these levels take on an importance because people are watching and getting ready to act.

You need to be aware of this dynamic.

Here is why 1,121 is important:



It is exactly the 50% “Fibonacci”  Retracement from the 1,576 peak in October 2007 to the March 2009 bottom at 666.  People react to key Fibonacci retracement of that magnitude.

Or, if you just strike out the word “Fibonacci,” then it is simply the halfway point between the peak and the bottom of the recent market decline.  That’s an important ‘mile-marker’ in the road.

Whatever happens here should give us a clue as to what to expect next.

A solid break above this line gives us further upside targets, including 1,200.

A failure to overcome this resistance line gives us short-term targets of 1,050 and perhaps 1,020.

Aggressive traders will be able to profit intraday from the inflection (reaction) that takes place at this level, if they have not already been doing so.

Watch and trade closely at this absolutely critical market level.