Focusing on the Five Prior SPX Daily Rallies and the Aftermath

Apr 28, 2011: 4:25 PM CST

As chartists, we have a tendency to over-complicate the simple price chart with a plethora of indicators and overlays.

We’re all guilty of this, and the solution is to take a brief moment to look at a pure price chart of a stock or index (or ETF).

When you do that, you tend to see things that you might otherwise miss.

For example, let’s take a look at five recent multi-day rallies in the S&P 500 and the resulting rally that continued from the strong two or three day rally phase:

As chartist, we tend to look for patterns in the past and then once that pattern forms in real time, try to assess the probabilities of a replay of past behavior onto the current pattern.

In other words, what happened in the past might happen now when a very similar pattern forms – or at  least it gives us a framework of what to expect for a possible ‘repeat play.’

I highlighted four similar three-day rally periods in the daily S&P 500 chart that were similar to our present April rally off 1,300.

With the exception of one instance – highlighted red – the market continued to rally after a similar strong impulsive move occurred.

As I highlighted to daily members last week (drawing a similar chart), I noted that given the current three-bar rally to the 1,340 area, if the past outcome of a similar three day rally has led to a continuation move to the upside, it’s a decent assumption to believe that the current three-day impulsive rally from 1,300 will lead to a similar upside rally continuation.

That’s what’s unfolding at the moment.

The purpose of this post is to get you to think in terms of concepts and price behavior (patterns), rather than indicators or complex charting strategies (especially for newer traders).

Sometimes the simplest method beats complex methods, particularly when those methods obscure the simple message sent by price itself.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

13 Comments

13 Responses to “Focusing on the Five Prior SPX Daily Rallies and the Aftermath”

  1. Rocky Balboa Says:

    Hi Corey…

    Read ur book on the weekend on my Kindle…great stuff…then started reading ur recommendations…just finished Mark Douglas's Trading in the Zone….

    Will re-read ur book again…U really hit it out of the park..!!

    One thing that wasn't clear to me, was what time-frames do u use the charts when day-trading…especially the emini es & ym futures….? u talked about MACD, ROC & momentum divergences with price …but i wasn't clear what time-frames r the most reliable…b'cos while momentum is confirming price action on a 15 min chart…it is probably diverging on the hourly chart.

    A little bit of education and your general observations on time-frames will help a great deal in my learning….

    Thanks much!!

  2. smiddywesson Says:

    Good. That makes sense.

    You might also point out that this tub of poop is a manufactured market, and the manufacturers are just people who may fall into a pattern of behavior that can be exploited, or the reaction of the market to those manipulations can become predictable. Whatever reason, profit is profit

  3. sandew Says:

    on Real Time basis, playing EOD time frame, you would go short just before Arrow 3 as the price would have triggered a downtrend on break of Swing.
    You would be ding nothing on Arrow 4
    Rather afterwards, you would be going Long on the third candle from right where the previous Swing levels get taken out.

    Maybe you can post a line chart for another perspective.

  4. Isitpossible Says:

    Few thoughts:

    The question is how far can the rally continue!!!! and Is this the best time to get in?

    Check out BPNYA (Bullish percentage indicator) & NYSE index chart. Every time BPNYA remained above 70 level, NYSE only managed to climb for another 2-4% max. after which either we see a correction or range formation. For now BPNYA is above 70 from Feb 3rd week onwards and based on 20 years of past analysis, my observation is we should see a range formation or market decline by next week onwards……

    As you said above…..
    >>>> what happened in the past might happen now when a very similar pattern forms – or at least it gives us a framework of what to expect for a possible ‘repeat play.’

    ONLY time will reveal the secrets 🙂

  5. sandew Says:

    Well,
    Another way would be to study break of trendlines to open positions.

    Secondly, this chart amply shows how market fools all of us, all the time or shows just the way we humans are – fallible.

  6. Corey Rosenbloom, CMT Says:

    Interesting comment!

    The argument by some is that charts show all that is both known and unknown (by the public) and is thus reflected in price.

    The danger is that too many people catch on and the pattern stops working, like the “first of the month pump” that worked for about 6 months in a row.

    I guess the goal is to find these little patterns before they become too obvious.

  7. Corey Rosenbloom, CMT Says:

    Possibly, as line charts are simpler than candles – I'm just so used to seeing patterns in candle charts.

    Simple patterns also include hand-drawn trend lines off price as you mentioned.

  8. Corey Rosenbloom, CMT Says:

    QE2 has two more months to go! Just kidding.

    I think the market is trapped in a positive feedback loop with popped stops (as in bulls buying or adding to positions, while bears also buy but to stop losses).

    This goes goes higher as long as the feedback loop of buying continues.

  9. Corey Rosenbloom, CMT Says:

    True,

    Trendlines are effective trade triggers.

    I like the quote “The market fools the majority of people the majority of the time.”

  10. SP500 Angular Momentum and Daily Rallies | Afraid to Trade.com Blog Says:

    […] Nevertheless, it’s important to quantify swings and know what to expect in the present based on historical data and simple pattern repetition. […]

  11. Terlyn12001 Says:

    I keep looking at the 60 min chart, and the momentum divergence is so strong, it's just really hard to buy into this, although momentum divergences do last a while. The breakout from the pullback was real, and the price projection makes sense, but the profits vs risks…okay daytrading no problem.

  12. Corey Rosenbloom, CMT Says:

    I totally agree – if we miss the initial breakout, then the reward/risk

    relationship deteriorates from a swing-trading standpoint.

    Of course, there's always the intraday little bullish patterns to trade

    on a lower timeframe in the direction of the higher timeframe trend but

    not everyone has the time to take those more frequent intraday trades.

  13. easystocksand shares.com Says:

    Rather than talking about the above chart I want to comment on your suggestion that we tend to make things more complex than they need to be. Some of my very best investing was done using a price movement chart with two moving averages (5day & 20day)
    Useing indicators have their uses but the basic skill of identifing chart patterns seems to be getting overlooked. By spotting some of the easiest chart patterns such as the ascending triangle has needed me good profits.
    My final point is regarding chart types. Here again a newer investor would do better to select one type of chart and learn all they can about using that type. Line Charts, Bar Charts, Japanese Candlesticks all have their uses but jumping between them when you are new at Technical Analysis will only get the newer investor hoplessly confused.
    Like you said above Corey, keep it simple and you'll be more successful.