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Is There An Air Pocket in the S&P500? Look Out Below!

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Photo taken from an ATR 72-500 while coming in to land on Sal island in Cabo Verde (Image: Ian Murphy)

We continue to see over-bought conditions and divergences from leading market indicators in the S&P500. The index pulled back to the moving average on Thursday and Friday, but recovered some of the lost ground yesterday. A more pronounced pullback or full correction is still on the cards and is highly anticipated by traders and market watchers.
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A daily chart of the S&P500 showing support and resistance levels

Rather than anticipating the timing and extent of a pullback, I like to have a plan in place for how to trade it - if it happens. When reviewing support and resistance levels on the S&P500 this morning, I noticed a large empty space between the levels of 2500/2510 and 2540/2550, as shown on the daily chart above. The top of this area is currently located around the -2ATR line, where the index can be expected to go if we have a pullback (look at the LHS of the chart).
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A daily chart of the S&P500 showing volume at price

When we examine this area using a Volume at Price Indicator (StockCharts.com), we notice it has the lowest trading volume since April of this year. The lack of volume in this area suggests there are no established support/resistance zones here. This is like an air pocket in the market. Frequently, when the price drifts down to these areas it takes a sudden drop.

We can’t say for sure when the market will return to this area, but 2500 is the bottom of the air pocket and round numbers have magnetic qualities which tend to attract a lot of orders.
© Ian Murphy 2018
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