E-Mini S&P Close To Completing Major Retracement

Looking at the news events from June to September and studying the chart pattern of the daily December E-mini S&P 500, one can conclude that the speculative buying driven by talk of additional stimulus from the U.S. Federal Reserve was the main reason for the rally from 1250.00 to 1359.00.

After the Fed accommodated the speculators, the focus shifted to the election, triggering a sideways-to-lower trade before the possible fiscal cliff shifted investor attention once again. Both the rally and the current break were driven by uncertainty, and like volatility, uncertainty can work both ways. Often uncertainty just means that investors want to see balance in the markets. So they tend to drive the market into an area which represents balance such as a retracement zone. Some traders even refer to it as a value zone.

Last week’s rapid sell-off in the December E-mini S&P 500 has put the index in a position to challenge a key retracement zone this week which means that speculative traders should watch the chart action carefully in conjunction with the news to see if a new support base can be established. It closely follows my theory that if you couldn’t buy it at 1250.00 and you didn’t like it at 1468.00 then why not take a look at the long side after the market has retraced 50% of this range.

Since the chart pattern has identified the value area, and the market is being news driven, it doesn’t pay to be a hero at this time and step in prematurely. Sure it’s nice to tell your trading buddies that you picked the bottom, but a bottom will not be established until big money decides to make it. Let the market trade into the zone then watch for a strong bid.

Short Covering
Keep in mind also that the main trend is down on the daily chart, so the first leg of the anticipated rally may be fueled by short-covering. Additionally, a retracement zone is often a natural price target so profit-takers may also decide to take action inside of the zone.

Technically, the Daily December E-mini chart sets up this way. The main trend is down because of the series of lower-tops and lower-bottoms. The main trend will not change to up until the swing top at 1363.50 is crossed.

Watch The Crosses
According to Gann Theory, the key area to watch is where a pair of Gann angles crosses. An uptrending Gann angle from the 1250.00 bottom, moving up at 1.00 per day is at 1363.00 today and a downtrending Gann angle from the 1466.00 top, moving down at 4.00 per day comes in at 1362.00. This minor cluster at 1363.00 to 1362.00 could provide a technical bounce today if tested, or a break through this area could trigger an acceleration into the retracement zone.

The long-term range is 1250.00 to 1468.00. This range has created a retracement zone at 1359.00 to 1333.25. This is the zone to watch and since it is relatively wide, traders should watch to see if a support base can form inside this zone. If the market makes a spike bottom, then chances are it was made by short-covering. If real buyers step in then it is probably going to form a base.

There is also one more retracement zone to watch. If Friday’s low at 1363.50 holds as support then look for a retracement from the top at 1431.75. This makes 1397.50 to 1405.75 a potential short-term target. Since the main trend is down, a test of this zone is likely to attract selling.

Keep in mind that a test of the main retracement zone is going to offer a counter-trend opportunity and a trade into the minor retracement zone will be in the direction of the main trend.