Three Day in a Row SPY Pattern Yields Profit or Peril

Feb 12, 2010: 12:55 PM CST

If you feel like the market is in Déjà Vu mode intraday, rest assured that you are picking up on a repeating pattern so far over the last three trading days, particularly for intraday traders.

The script is as follows:

Weak open,
rally into EMA resistance,
‘fake’ down-move,
burst above resistance into new intraday highs,
finally a pull back into the close.

And… Action!


(Click for Full Image)

For those who have picked up on the pattern, it has yielded simple profits, but for those repeating the same mistakes, it has been a Groundhog’s Day of sort – repeating the same pattern over and over.

This post looks at why it’s important to assess the “Character” (behavior) of a market as best as possible.

I mentioned this pattern in last night’s Idealized Trades Report and discussed the importance of seeing history repeat almost literally the next day.

Little did I know the pattern would repeat almost exactly into the third day in a row!

I first posted on a similar failed Bear Flag set-up in a February 6th post:

A Lesson Inside the Failed Bear Flag

which takes a closer look inside a failed pattern.

Generally, in a down-move, we look to short rallies into overhead resistance, such as Fibonacci levels or – as shown above – the 20 or 50 EMA intraday.  Trades are often triggered when a reversal candle forms.  Traders place stops above the EMA levels and anticipate retests of the lows.

However, the market has instead been setting up Bull Flags that pull back into resistance areas instead of expected bear flags, and the resulting rally after resistance is broken results in some “Popped Stops” for those shorting the morning retracement into resistance.

One day – no big deal.  Two days, you think something strange is afoot. Third day?  You should perhaps EXPECT the rally into resistance to fail and then capitalize on the surge to the upside once resistance is broken.

It reminds me of the old quote:

“Fool me once, shame on you.  Fool me twice, shame on me.”

More than anything, this lets us know the importance of studying the ‘character’ or behavior of the market, which attempts to answer questions such as:

“What indicators or patterns is the market favoring?  Which are the market “mocking?”

“Is there a particular strategy (gaps, flags, breakouts) that is working better over the last few days?  Worse?”

“Is the market in a volatile, trend move or a more subdued choppy range?”

History does repeat – that is a fact.  It’s just unusual and perhaps worth noting that we’ve had (so far as of noon Friday) three days in a row of the exact same pattern.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

4 Comments

4 Responses to “Three Day in a Row SPY Pattern Yields Profit or Peril”

  1. gappergal Says:

    two thumbs up Corey! The best analysis I have read this week…like the simplicity of your analysis. I heard fear and grumblings about the negativity of this market…I am seeing green…great color.

  2. Red Dragon Leo Says:

    Corey,

    I must admit I'm lost as to which direction the market is headed too next. I see both bullish and bearish patterns on different time frames and charts. Some Bloggers are calling for a move up to 1092, and then 1100, and others are calling this current level the top. What are you reading into next week?

  3. Red Dragon Leo Says:

    Corey,

    I must admit I'm lost as to which direction the market is headed too next. I see both bullish and bearish patterns on different time frames and charts. Some Bloggers are calling for a move up to 1092, and then 1100, and others are calling this current level the top. What are you reading into next week?

  4. How Many Times will the SPY SP500 Repeat the Same Pattern Intraday? | Afraid to Trade.com Blog Says:

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