Thursday, November 17, 2011

SPY Pattern Update

Click on Chart to Enlarge

The chart above has an updated wave labeling on SPY. It looks most likely to me that this rally is now complete. However, if it is not then I expect a push to new highs over the next 2 weeks.

The reason I believe the rally may be complete is due to pattern and the bollinger bands. The data I recently showed would suggest that a new high is likely on the rally based on time averages. That has to be used as a guideline, but it's not set in stone.

Many chart analysts have noted the symmetrical triangle that formed in SPY over the last few weeks. Many expected it to break to the upside. I have noted in the past how complex corrections often END with contracting triangles, and that often throws people off on the direction of the breakout. That is what I believe is happening here. It looks to me like a w-x-y pattern ending with the "y" pattern as a contracting triangle. A triangle would not be expected to form in the "y" position if a "z" were to follow. The triangle is the typical ending pattern. By that logic, this suggests the current rally in stocks may be over.

I noted earlier today that the QQQ made a downside breakout of its bollinger bands. It did close beneath the lower band today, which is good confirmation of a new trend. I would expect the market to continue in the downward direction in this case.

On the other hand, the bollinger bands on SPY contracted slightly today, and the market touched the lower band, but it closed up slightly from the lows. So the jury is out on this one. A gap down and low close tomorrow, below the lower band, would be great further confirmation that the broad market is likely turning lower.

My take is to maintain the view that this is a bear market rally in stocks that is topping, and that commodities are going to continue down as well. Check out the USO etf. Oil put in a confirmed doji topping candlestick. Oil has been propping up the commodity indexes, so a top in oil will likely weigh heavily on commodity/energy stocks and the commodity indexes.

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