SP 500 Forms Cradle Buy

Apr 9, 2009: 1:08 PM CST

The moment Bulls have been anticipating has arrived:  The S&P 500 Index officially formed a “Cradle Buy” signal with today’s bullish action (also known as a “Golden Cross”).  Let’s see this up close and discover what it might mean.

Before we get to the cradle, let’s look at the “Three Push” pattern, or Triple-Swing Positive Momentum Divergence that has set-in underneath price off of the October, November, and March lows.  The 3/10 (and most other momentum oscillators) made higher lows as price itself made lower lows – this is often indicative of at least an intermediate trend/price reversal so please be aware of this.

One non-confirmation of higher prices is that volume is trailing off as price continues to make higher highs off the March lows – this is concerning for the bulls, so wild, rampant bullishness is not warranted until volume begins to pick-up with these higher prices.

That being said, the Bulls got the Cradle Trade officially today, which occurs when the 20 EMA crosses above the 50 EMA to form a “Golden Cross,” and price comes back down to ‘test’ or ’sit on’ this level (I call it “Coming Back into the Cradle”) for possible support.

The Cradle is effective because it gives you the exact price point that – if a trend will reverse – it will most likely do so off this level.  In addition, if the price fails to hold the cradle (breaks beneath it), then your stop would be about the 800 level which would be very close underneath the EMA crossover point.

If we do actually get a trend reversal (and that’s looking more likely thanks to the Cradle), then you will achieve a much larger target (perhaps up to 1,000 or 1,100 in a few months) relative to your stop – therein lies your edge.

Needless to say, the formation of the EMA crossover and thus the “Cradle” is remarkably bullish and needs to be taken with seriousness.  There’s of course no guarantee the cradle will hold (it’s not infallible), but it is a price structure that – more times than not – leads to a price reversal, especially when it forms after such a powerful momentum divergence.

Corey Rosenbloom
Afraid to Trade.com

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

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Comments
  • The formation of the EMA crossover and thus the “Cradle” is remarkably bullish and needs to be taken with seriousness.
  • I have not much time, but I've got many useful things here, love it!
  • Anonymous
    The bottom happens when there is a lot of despair, helplessness but who said th bottom will have to be in the next month or two? so quick?

    I think we rally now to the mid - 900s or 1000, then go down. I guess the bottom happens in the 1st part of 2010.
  • TN,

    Good comments - I'll try to post a daily chart of the stocks you mentioned if I see a good pattern to highlight in them. All eyes are on the Financials and we do expect them to lead the market - it's good analysis to zoom-in on key financial stocks.
  • Anon,

    The Cradle Failure occurs when price breaks beneath the confluence EMA support zone - it does happen from time to time. The stop is placed just beneath the EMA confluence and is low compared to the large target should the cradle hold.

    It's up to you to determine your risk-tolerance/preference. You want to try to buy as close to the Cradle as possible, and if you wait for confirmation, you'll ultimately earn less profit than those who bought into uncertainty. That's the name of the game though - the balance.
  • Neil,

    Exactly. That's certainly a possibility, one that has been forecast since late last year - that of an ABC up to 'trick' the people, then more bad news hits the system and plunges it down to a new low. I think a lot of people would be completely turned-off on the stock market... but that's precisely the psychology we need to form bottoms - not this optimism we have right now.
  • Andrew,

    While things seems so murky a couple of weeks ago, the bullish picture seems to be clearing up, yes. As long as the Cradle Holds, of course. If it failed it would throw us back to a bearish posture.

    I'm regarding this move in part to 'drunken bulls.' Irrationalities sounds more professional to say!

    I'm with you!
  • TradingNewbie
    I also noticed something very interesting....these 3 stocks that can arguably lift this market to the 1000/1100 level:
    C, BAC, GE

    BAC: Looks like cradle of 20ema/50ema has completed and looking very bullish
    C: approaching cradle point. i am thinking citi will blow away expectations next friday and sky rocket.
    GE: approaching cradle point. will probably also beat expectations but not blow it out of the water.

    these 3 stocks might be the catalysts for the push to 1000/1100 on the sp500 and i thought its interesting that all 3 are on verge of a breakout (BAC has already begun its breakout)
  • Anonymous
    Hi Corey,

    what if the cradle is a failure? Should we wait for confirmation? Or should we buy on a pullback?
  • Neil
    Hi corey .... it all seems to be preparing for the test of that 200 sma. But just a thought ..... If it does go up to test the 200 sma and reverses, playing the EW structure that we are anticipating ... that would be too much for the people ... I mean from 650 levels back upto 950-1000 level, and then a new low .... Trust me, it'll be a big blow for bulls and more importantly the common people, cos u know the common man is a bull by nature.
  • Andrew
    Corey,

    I was waiting for that cradle to be tested and treated as a buy signal. It’s amazing how clear things are getting!!

    (I remember watching the futures that night and in the AM, they were sitting right at the 805 cradle mark, but had an upswing right before market open: Perfect)
    I mainly live on Afraid and PSW (both best analysis for technical’s and fundies/technicals) and was wondering what your view of the fundamentals picture is?

    Watching equities action lately compared to some of the actual realities on these banks balance sheets, it’s hard to determine which is "bull****". I guess you kind of just have to trade with the "irrationalities" of the mass crowd.

    Well, looks to be a long weekend and a good time to review pullback and upside targets. Vix broke the downside today and looks like some real money might start to come in.

    Enjoy the ride,

    Andrew
  • Greg,

    Did we officially test it in a textbook fashion, no, but I don't see us falling back to test it officially - it looks like this will be all we get in terms of an 'ideal' pullback with a very tight stop. The bullish EMA crossover is a structural component and the Cradle Trade is an opportunity that exists because of that structure.

    There's the balance between being too early and too late again, but for the time being, it looks like the Cradle Cross zone should be expected to hold.
  • Don,

    It could be, but also remember that people might be selling stock to account for any taxes they owe. That doesn't seem to be having much of an effect though, does it? Could be IRA contributions as well. I think the Government's up to something as well, but that's another story.

    Right, we now have to look up to overhead resistance, as support is now established. The path of least resistance seems to have changed now to the upside. There's a sense of 'good feelings' reverberating right now.

    I'm referring to the ABC Wave 4 that could be shaping up now for the 1,000/1,000 target.
  • Greg M.
    Corey,did we come down enough to offically test the cradle since it formed on 4/8? Seems like we missed it by 12 points or so.
  • Anon,

    Good point - looks like we'll have to consider this now a large-scale ABC up until proven otherwise. This is most probably the big ABC corrective up move I've been anticipating, only that it came one swing too early (I expected one more downswing to complete the fractal 5 of (5), but we take what the market gives us and sometimes it will be just a little early.
  • JCM,

    And that's a very big deal to me - the weekly 20 EMA could be expected to hold as resistance, but if it breaks and holds above it, then that's a very powerful confirming bullish signal.
  • Ross,

    The first of the year didn't give us a Cradle on the daily chart - that's specifically when the EMAs crossover and price pulls back to the crossover zone like we have now.

    But you're right - the higher timeframes can't be ignored and longer-term averages give us more reliable signals than short term.

    But short term structure/momentum will precede long term structure/momentum. There's always a trade-off between 'too early' and 'too much chart information'.
  • Chris,

    I'm so glad to hear that! It's good to feel like I'm making a difference with my daily posting. Thank you for sharing.

    Yes, the 667 low may yet prove to be very, very significant and the rally off that level could be the beginning of the ABC I've been expecting... but that it came one swing too early!

    A 30% return in a month is certainly a move to be proud of.
  • Chris,

    The "One day at a time; one swing at a time" philosophy is probably best in such volatile markets that we have now. It's still a bear market rally, but this could be a stronger than expected rally, particularly if the Cradle holds.
  • Don-Da-Mon
    Two points/questions
    1) Is it too simple to think that people are tying to get their IRA deduction and hence there is more buying going on? This might end say... April 15th?
    2) It looks like the chart is setting up to test 934 (or there abouts), from the start of the year. Imagine the euphoria that peoples 401ks are above water for the year!!! I'm not so sure about 1000 or higher but this surely is a welcome break.
  • Anonymous
    I guess the "Ending Diagonal" pattern for Wave 4 is being thrown out the window, too.

    That's not the why that I understand it.
  • JCM
    S&P also hanging a hair above weekly 20EMA at the moment...
  • Ross Williams
    The last cradle formed near the 1st of the year and it threw the baby down a stairwell 200 points long. Secular bear markets require the use of MUCH longer MAs. I personally will start thinking of going long when the 200-day is breached which is a very long way from here...
  • Chris
    Corey,

    I almost got the near term bottom. I put 40% of my 401K cash back to work at SPX 682 on March 6th that I bailed out at SPX 1260 area. It was hard to stay in cash for over a year but it was the right thing to do since 401K's do not offer any "Short ETF Funds" I cannot believe I'm now break even in my 401K since this Bear started.

    Your charts on DOJI candles and poss. divergences & MACD understandings helped me understand it was time to go long that day on that Daily print candle.

    Now just have to let the trade work of next 2-4 months until we get near SPX 1000 - 1100 area then go back to CASH in 401K again as final bear market wave down in Major Wave C begins.
  • Chris
    Good Chart ... I believe the Bear Market Rally is on HOWEVER its not the end of the Bear for a long shot ... I will be looking to exit swing longs later on in the year and position short for EW Major C down which will offically end the bear (SPX 475-SPX 550 Area).

    I know one day at a time but longer term this is how I see it.
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