Friday, May 15, 2009

Market Pattern Update As I See It

Click on Chart to Enlarge

In the post last night I jokingly said "why am I in SSO?" because of the sour note of the post. Just to be sure, the reason was that the short-term model was oversold above support and I thought at the time that the pattern favored another upside move.

I am about 50/50 on 2 scenarios right now, but there are rules that apply to certain patterns that help you rule them in or out. Without rules, attempts at pattern recognition are probably fruitless, and I think most often it is just best to stick with technical analysis and contrarian data analysis.

A rule for contracting triangles is that after the "e" wave completes, it should be completely retraced in less time than it took to form. So from the labeling above, the "e" wave is about 8 days long and began around the 850 level. From last week's high that means we have to see the 850 level undercut by Wednesday at the latest to confirm the possibility that a contracting traingle formed. If that doesn't happen, then I think it is best to assume there will be new highs for the rally.

The second scenario would be that the current pullback is a middle correction between two strong advances. I have put light blue boxes around what I have labeled as "b" and the current area because in this case I would expect some degree of price and time similarity between those pullbacks if the market does make new highs. The largest pullback so far this rally was 6.5%. A 6.5% decline off the recent highs would put the S&P around 870. A rule of thumb I use is that any pullback more than 1.2 times the largest pullback likely indicates a trend change. So if we see this correction go 8% or more, then that would call any new highs into serious question even if it is a slow pullback. The chart above shows what I view as the major overhead resistance levels should the market push to new highs.

I have said before on the blog that I use patterns only as a "filter" for choosing what objective indicator signals to act on for blog trades. My usual MO is to trade short-term only but will attempt to catch larger moves at major reversal points when the risk reward is very favorable for a longer hold. That has been what I have been selectively attempting for about 6 weeks now, without catching a major turn yet. From experience, it takes several attempts to both catch a major turn and do so with a very small risk relative to reward.

As for the current SSO trade, it did not get filled on the suggested limit order, so we just wait for the next overbought signal for the exit.

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