The markets for some reason are much more sensitive to pattern repetition lately – so that begs the question:

“Will the current rally pattern continue?”

Oh – first, let’s define the rally pattern and then see what the current ‘pattern completion’ and target is.

Officially, we’re in a sideways trading range that began in June (or late May).

So far, the daily ‘rally’ pattern is the following:

1.  Bounce off 1,040 (or 1,010) after reversal candles
2.  BIG rally day then small up day
3.  Continuation up to 1,130

This was the case with the bounce off the respective June and July low – notice the candles and then pay particular attention to the BIG rally day bar followed by a small rally day.

In the case on June, we rallied almost non-stop to 1,130.

In the case of July, we had some trouble initially at 1,100 – resistance – and then found support to rally back to 1,130.

And in September, we have the pattern appearing to re-form and we’re halfway through the current pattern.

Bounce off 1,040 from reversal candles?  Check.
Big one day rally followed by smaller rally next day?  Check
Rally up to 1,130?  To be determined

Here’s the daily structure chart:

I’ve been showing this chart in the Daily Idealized Trades reports to subscribers and argued very strongly for a bounce off 1,040 – that materialized as expected the last two days.

That’s because we had short-term bullish trendline breaks, positive momentum divergences, and positive triple market internal divergences… and of course the support pattern I’ve been defining off 1,040.

And the rally materialized to a strong degree.

And now … resistance from a ’round number’ standpoint exists at 1,100 and if we clear that, we can expect to see 1,130.

But of course, the over-ruling variable is tomorrow Morning’s Jobs Report.

A better than expected report will almost certainly send the market rocketing through resistance and on to its “pattern projection” target of 1,130.

A worse than expected report may be powerful enough to break this pattern and eliminate the pattern completely – plunging the market back to 1,040.

And an ‘in-line expectation’ may keep us within the parameters of the pattern and on our way back to 1,130.

Keep an eye on these levels, the pattern, and how the market responds to the Jobs Report – slated one hour ahead of the Open.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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What are market internals saying about the recent rally?  They strengthened with a positive divergence ahead of this week’s rally but now….

Let’s take a quick look at S&P 500 Market Internals as they stand now:

First, let’s start with the positive divergence signal sent on August 31st from Market Internals.

As I show frequently, positive divergences in market internals often forecast – or at least hint – positive reversals in price that NEED to be confirmed with trendline breakouts for trading signals (taking off short-positions and putting on new longs).

That’s exactly what happened as the market fell again to the 1,040 level on the morning of August 31st – all three key market internals were HIGHER as price pushed to the swing low.  That’s a bullish hidden caution signal and we got the trigger and follow-through the next day (with the big gap and rally).

Now that we have the rally, market internals are declining.  That’s exactly what you would expect and it’s a normal progression – it would be almost impossible to sustain the high levels of bullish internals domination seen yesterday.

So, even though price is higher this morning, internals are declining.  That’s a non-confirmation, but it’s not yet a “rush to the exits and panic” signal.

Look for trendline breaks or other price-based sell signals for confirmation.

Remember, tomorrow’s Jobs Report could be a major market-moving event, but as it stands at the moment, internals are declining (or lower than they were yesterday across the board) as price is rising so that’s certainly a present caution signal.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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It’s often helpful to pull the timeframe back to see what the weekly and sometimes monthly chart are showing about popular or volatile stocks.

That’s especially the case right now in Google (GOOG).  Have you seen its monthly chart lately?

Let’s take a quick look:

A quick glance shows us a double chart confluence at the $440 price level – that’s your reference level going forward.

The 50 week EMA rests at $443.35 – but that’s not as important perhaps as the 61.8% Fibonacci retracement as drawn at the $439.34 level.

The $440 level is also a price polarity point (fancy word for “it’s been both support and resistance”) from the closing low of March 2008 and March 2007 – as well as a level of resistance in 2006.

Interestingly enough, volume has been steadily trailing lower and lower over time, and that doesn’t appear to be a factor of stock price if you look closely.

As is the case with Apple (AAPL) and many other high-flying stocks, volume tends to be very heavy when the share price is low (people purchase more shares for positions) and then decrease as the share price becomes more expensive.

Google has swung up to $750, down to $450, back to $625, and now down to $450 and during the whole time, volume has steadily trailed off.

The volume spikes in the scenario came in during the sell-phases in late 2007 and late 2008.

Going forward, watch for bulls to support price at the $440 level, and if bears can push price to close strongly under $440, then we have a lot of room to the downside.

For reference, overhead monthly resistance appears to be a loose zone at $500 – that’s the 20 month EMA at $482 and the 50% Fibonacci line at $498.

Corey Rosenbloom, CMT
Afraid to Trade.com

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It’s the same price pattern I’ve been highlighting for quite some time now, but perhaps now is a good time to define the pattern, show it, and state what it means for traders.

Reference my prior post:

“Magic Mystery Buyers in the S&P 500 Define Bull/Bear Battle.”

First, the pattern:

A lot of people are picking up on this pattern – or at least they should.  What is it?

So far, every other day, the S&P 500 has tested the key 1,040 level exactly, and each time – including this morning – buyers have rushed in to support the market, causing a sudden up-burst in price immediately following the test.

The pattern can be described as such:

1.  Market falls to test 1,040 (usually on a bad economic morning data-point)
2.  Surge of buy-orders flood the market
3.  Market bounces very sharply
4.  Bears rush to the exits, buying-back shares in a short-squeeze
5.  Market rallies to the 1,060 level (or beyond)

That’s the short-term pattern that has been in effect since last week that appears to be repeating into this week.

It’s like a cycle – sort of like Groundhog Day (the movie) – where you wake up and the events of the day repeat themselves exactly.

Traders who have caught on to this pattern early may have made a LOT of money this morning as the pattern repeated.

But this isn’t the only time this has happened – let’s take a look back at the two prior tests of 1,040.

May 25, 2010 (after the “Flash Crash”):

June 6, 2010:

An almost identical pattern of sharp downside move to 1,040 followed by a rush of buy orders that supported and then bounced the market higher occurred just after the Flash Crash and in early June.

To be fair, this pattern failed as the market broke under 1,040 to bottom in early July at 1,010, but one has to admit this pattern is well-entrenched.

By pattern I don’t mean “head and shoulders” or any classical sense of the word, but rather a sequence of events that happen that repeat.

So far, this pattern has successfully repeated 5 of the last 6 instances since May.

While it’s tempting to attribute this to manipulation, it is supply and demand that move market prices.

From where that demand comes -we can debate that all day – if demand/buyers are able to overtake supply/sellers, then the price will rise.

It’s not important to know from where the demand originates – just that it does.

And as price moves – perhaps unexpectedly – off a key support level when traders expected the level to shatter and break, then those traders who bet against support holding -in other words, going short – are then forced to take their stop-losses and cover (buy-back shares).  This action helps add demand to the price rise in motion – perversely driving price higher and higher.

So, as long as this pattern is in place – or should I say, these same buyers continue to rush in to buy shares to support the market at 1,040 – we can expect the pattern to repeat.

By the same token, should the market break solidly under 1,040, we can expect these same buyers – assuming they have not been selling shares on the bounces to the 1,060 level (and then re-buying shares at the 1,040 level) – to rush for the exits and take THEIR stop-losses, creating a potentially harsh downside move.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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As we wind down August 2010 and get ready to start a new month soon, let’s take a quick overview look at the daily charts of leading financial fund XLF and its popular double-short (double inverse leveraged) fund SKF.  There’s some interesting things to note.

First, the XLF Daily Chart:

Starting with what jumps off the chart at you, we see the similar range-bound rectangle trading range between $15.00 and $13.50 that we see in the S&P 500 – and those will be the price reference levels traders will be watching.  Until proven otherwise with a breakout, we would expect price to remain within this range.

But there’s something else that you should note – remember that the S&P 500 is supporting at the 1,040 level, above the July 2010 low of 1,010.  That means the S&P 500 is currently forming a HIGHER LOW on the August low, while the Financials (XLF) fund is forming a LOWER LOW.

That’s important to note, as many investors see financials as a leading fund over stocks.  Right now, it’s just an interesting note that the XLF just made a fresh new 2010 low (by a few pennies) while the S&P 500 (and other US equity indexes) remain above their July 2010 lows.

Otherwise, we have a positive momentum divergence in the 3/10 Oscillator and two bullish ‘power’ candles that could forecast a rally at least to the $15.00 level.  Look for that to develop if indeed price remains in its short-term trading range.

With that being said, a lot of traders turn to the leveraged funds to get more mileage from moves in the financials (or other ETFs).  That’s fine if you’re an intraday trader, but let’s take a quick look at the SKF – a popular leveraged inverse financials fund, to see why “investing” in double inverse funds can get you in trouble.

SKF:  2x Leveraged Inverse Financials

Compare the two charts visually very closely.

The XLF (as did the S&P 500) had a key swing low in February as the SKF fund pushed to a new 2010 high – that’s what we would expect.

Then, the market rallied non-stop off that low to peak in late April ahead of the “Flash Crash.”  Of course, the SKF suffered a steep decline during that three-month period, bottoming in April at the $17 per share level.

As the XLF fell sharply, the SKF rose appropriately… but not back to test the high of the year as was the case when XLF tested the low of the year.

Even more blatant is the fact that the XLF – and broader markets – broke to fresh new 2010 lows in July.  A casual observer would expect the SKF also to rally to fresh new 2010 highs – but this was clearly not the case.

That’s the ‘danger’ to investors in these leveraged funds – they track day-to-day changes in terms of percentages, but DO NOT track in the intermediate or long-term.

In other words, inverse leveraged ETFs are deteriorating vehicles that will continue to wind their way lower and lower and lower over time.  But that’s a whole other discussion.

Anyway, as the XLF formed new 2010 lows, the SKF peaked at the $24.50 level, down around 8% from its 2010 high.

Now, as the XLF made another small fresh new 2010 low recently, the SKF made another LOWER HIGH when it “should have” (to the casual observer) made a higher high.

Instead of making that higher high, the SKF was comparatively down about 3.5%.

Look closely also to find that – instead of simply testing the “double bottom” at the start of August as the XLF tested a “double top” at $15 – the SKF actually made another LOWER LOW.

Anyway – keep this in mind and be certain to read the prospectus of any ETF you purchase.

Also, be aware of the realities of the deterioration over time of leveraged ETFs – once again, fine if you’re using them as intraday trading vehicles to get more mileage (profit) from your positions, but NOT FINE if you are investing in them.

Even Jim Cramer gets riled up about this topic!

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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