It’s common to ask the question when price breaks a key resistance level, “Is this a real breakout that will last, or is this just a short-squeeze situation that won’t?” That’s the operative question now - let’s take a look at the price breakout in the S&P 500 and try to make a determination with the information we have so far.

Click on image to enlarge!

The 1,111 area was key resistance (a key inflection point), being the 61.8% Retracement, a descending trendline, and prior price resistance (late February high of 1,111).

As traders, it’s best not to get biased in either opinion (”Resistance will hold.” or “Resistance will break.”) and take the Mark Douglas approach of “Price has entered a key inflection point that has to break one way or the other, and enter once we start to see a movement and place a stop on the other side” (Trading in the Zone) and especially take advantage of any unexpected breaks by playing intraday.

Once 1,100 did break Monday (with a gap), we had the classic “Popped Stops” buy play which was a benefit to intraday traders looking to play long off the short-squeeze that came from resistance being broken.

Now that the resistance is broken, we want to know if this is just a “quick blip” (a one or two day ’short-squeeze’ rally, where the buying is mostly fueled by short-sellers covering) or something else, where buyers are stepping up and driving price higher, creating a true breakout.

Right now, with the information given, it “feels like” a popped-stops rally,” and that’s evidenced by the choppy intraday action yesterday, divergences in market internals (see yesterday’s post “A Mid-Day Check on Divergent Market Internals“), declining volume (usually you want to see increased volume on a key break such as this), etc.

However, take a look at the highlighted regions I’ve drawn on the chart, which represent similar “Popped Stops” rallies that continued to drive price higher on lower volume all the way up (particularly October, November, and early January).

What’s a trader to do?

Stick to your intraday trading in such situations where price has been known to rally without stopping while forming all sorts of bearish non-confirmations.

Look to short weakness on any confirmed trendline or moving average break (a divergence is not enough evidence to get short - confirm entry with some sort of price breakdown).

Be on the lookout for any bullish signs such as a rise in volume, strengthening in internals, etc.

Until then, trade cautiously with the conflicting information out there.

For more daily updates from Corey, visit his blog at Afraid to Trade.com