With a Breach of Support What Might the Major Market Averages Do in the Short-Term?

Tom Gentile

Posted in
Technical Analysis

By: Tom Gentile
March 10th, 2023

3 mins read

When a security breaches a price support or resistance level there are a few things to decide concerning what to do next.  This article will address some of those things.

Figure 1: 120-Day Candle Chart SPY with Support Price Level Breach
Figure 1: 120-Day Candle Chart SPY with Support Price Level Breach

Old Support / New Resistance

When a security breaches a support level (or a resistance level) for one day one can either be really aggressive and trade options in the direction of that break right away.

A more conservative approach is to wait another day or two to see if it continues to stay below that support (or above that resistance).

There are times a one-day breach will happen only to see it fail to hold below support (or above resistance) and go back to its prior trend.  That is referred to as a false bar/candle breakout.

This is the second trading day in a row SPY is trading below a support level.

It would be understandable for one to decide to get bearish.

The other thing to pay attention to is what if the security hangs on to that old support new resistance level for a handful of days or more.

Price action in that case could result in the security trading right around that price level breached over a number of days.  The green arrow in the chart image below shows the old support price level that if prices come back to that and hang there before it start to make another price move down solidifies it more likely the old support becomes resistance.

Figure 2: 120-Candle Chart SPY with Fibonacci Retracement
Figure 2: 120-Candle Chart SPY with Fibonacci Retracement

What Direction Do You See the Market Going?

When it comes to what to do next, it comes down to your directional prognosis.

Do you believe there is a greater chance of equities selling off even more right now?  If you do then paying attention to the Put options activity in the Morning Reports lists.

If you want to wait and see what things look like next week and not trade for right now, we would understand that decision.

If you do wait and see price test the old support area as new resistance then you are back to analyzing the Put activity on the Morning Lists reports just a little later start date.

And if you believe the sell off is over and the bears have likely been flushed out and the bulls will step in, or the price action is higher to the point it clears that old support new resistance level you would likely pay attention to the Call option lists in the Morning Reports.

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