Another Moment of Truth

The term “overhead resistance” refers to a price level that should be difficult to rise above.  When I wrote my first post back on May 2, 2011, it was to note that trend lines and Fibonacci patterns indicated an approaching top that might be difficult for SPX to overcome.  As it turned out, May 2 was the top, and we saw a substantial correction of 21.6% that was touched off by a beautiful shorting opportunity that fulfilled an analog forecasting the drop to the very day and dollar [see: Analogs.]

We’ve had many additional shorting opportunities over the years where overhead resistance proved potent enough to provide substantial shorting opportunities.  In April 2012 we were rewarded with an 11% short after a Butterfly Pattern completed [see: All the Pretty Butterflies.]  A few months later, in September, we nailed up a 9% correction courtesy of another important Fib level [see: The World According to Ben.]Another fun one was in May 2015, when SPX came within 4 points of our long held upside target at the 1.618 Fib extension at 2138 [see: The Last Big Butterfly.] This one was worth a healthy 12.5%.It was followed by a 14.5% correction in November when the rebound completed a Bat Pattern [see: Beware the Bat.]There have been countless other levels of overhead resistance that: (1) provided meaningful opportunities for traders to short; and/or, (2) warned of substantial declines for buy-and-hold types.

At times, however, important overhead resistance has simply melted away.  The 1.272 extension at SPX 1823 was an important Fibonacci level that should have smacked stocks for a minimum of 13.5% in late December 2013.

Instead, SPX virtually ignored it until after the fact — when it was backtested an astounding seven times over the next two years.  It was irrelevant as resistance, but incredibly important as support.

Once SPX broke through the 1.618 extension at 2138, it’s been off to the races.  The next important Fib level is the 2.24 extension, which is 2703 for SPX and 2728 for ES.  As we’ve been discussed the past few days, we’re there.It required a bit of gymnastics (and, loads of help from the algos) but SPX gapped up through its 2.24 on Wednesday and ES tagged its just yesterday.  Both moves required a resurrection of broken down channels.  And, both have left us wondering whether or not there’s any integrity at all left in the “markets.”Overhead resistance is still relevant.  But, it has increasingly become a test of the extent of the manipulation being exerted.  There is little that can’t be accomplished with well-timed ramp jobs in USDJPY or oil or a severe smackdown in VIX — particularly against a backdrop of record setting stock buybacks and central bank accommodation that continues a full ten years after the crisis.  When we see SPX gap through important resistance like this, we have to wonder whether market integrity has reached its own overhead resistance — whether it has failed its moment of truth.

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