Will February SP500 Pattern Repeat and Show the Future?

May 26, 2010: 8:09 AM CST

One of my favorite things about technical analysis/charting is uncovering past patterns that resemble what’s happening right now in the market.  Doing so allows for comparison to see if history is repeating, and if history repeats – or the pattern repeats – then we have a literal roadmap to the future.

This is also known as studying the structure or character of a market – in regard to repetition in behavior and supply/demand.

Theory aside, let’s look at the “ABC” Pattern from January/February 2010 and see if we’ll get a repeat from an identical pattern that formed in April/May:

I showed this chart and added extra discussion in last night’s Idealized Trades Report for subscribers.

Let’s start with the January/February “ABC” Pattern:

1.  Breakdown of 20 then 50 day EMA with strong sell bars
2.  Rally into the Crossover of the 20/50 EMA – “Cradle” Trade at 1,100
3.  Sell-off as expected to New Lows with a Positive Momentum Divergence
4.  Strong Hammer/Lower Shadow Candle off the low (dip under 1,050)

After that, the market rallied, breaking back above the 20/50 EMAs… and on to new highs.

Let’s compare that with the April/May “ABC” Pattern so far:

1.  Breakdown of 20 then 50 day EMA with strong sell bars
2.  Rally into the Crossover of the 20/50 EMA – “Cradle” Trade at 1,170
3.  Sell-off as expected to New Lows with a Positive Momentum Divergence
4.  Strong Hammer/Lower Shadow Candle off the low (dip under 1,040)

After that….

Is this where the pattern similarity will break apart… or continue?

If we get a full repeat, we can expect a rally to new highs.  The pattern falls apart with a break under 1,040.

Should be interesting to watch and trade.

Reference last night’s post:  “So… Why Exactly is Technical Analysis Important?” Another reason is this – pattern analysis and forecasting.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

16 Comments

16 Responses to “Will February SP500 Pattern Repeat and Show the Future?”

  1. Matt Says:

    Hey Corey,

    That is the big question. 1220 to 1180 could have also been wave one, where A is actually Wave 3. Let's see if we get an ABC correction off this or something larger confirming higher prices yet to come. Time will tell if history is about to repeat itself. Great post once again.

  2. Corey Rosenbloom, CMT Says:

    Exactly!

    This next swing should tell us if we're finished with the “ABC” retracement in the context of an ongoing bull market, or if we dip under 1,040, then we'll change the count to 1, 2, 3, 4, 5 and change bias to a new downtrend instead of a deep retracement.

    Good call!

  3. Deb Ghosh Says:

    Yes it is similar pattern. But there is a big difference , this time hammer fomation is below 200 day SMA which will be showing weakness on rally, if we do..

  4. jony Says:

    I agree with Deb´s comment above

    this time there´s a relevant difference, the 200 MA on the way

  5. dumbpainter Says:

    the 200ma is up sloping…if it was downsloping, we'd be in a different boat. Big difference, check back at 2002 etc. check the slope, resistance etc.

  6. ajay Says:

    Hi Corey,

    I'm big fan of your blog.

    As per your post 'repeat the future'. I don't think so. It is showing lot of difference comparing to feb. 2010 low and this months low. When viewing weekly charts Feb. low has stopped above 50 ema, and this time it is closed below. And where is 2010 feb. drop is so weak compared to this months bear attack is severe. kindly check and comment if i'm correct or not correct. I'm required your comment on this as well as my analysis.

  7. ajay Says:

    Hi corey,

    Just now i have checked monthly candles. wow…mind blowing.. this months candle alone erase previous 3 months gains and formed big red candle. And the top bollinger band falling rapidly, whereas lower band moving like tortoise. May be it will test 9025-9050 level on dow? can u spend a time on this.

  8. Corey Rosenbloom, CMT Says:

    That's true – that's a major difference between now and then.

    The 200d SMA is seen as key, and it's at 1,100.

    Let's see how that affects traders and how far the bounce will go.

  9. Doug Jones Says:

    Right on Corey. What are some resistance levels on the upside that we should monitor?

  10. Corey Rosenbloom, CMT Says:

    Thanks Ajay! Glad to have you as a reader!

    True, I didn't take into account either the 200 SMA or the respective weekly EMAs. That's a difference.

    Structurally – price wise – the patterns are the same and so far we're getting a bounce, but I'm anxious to see how far it lasts.

    The current patterns is a larger 'fractal' of the smaller one, but still similar in structure.

  11. Corey Rosenbloom, CMT Says:

    Yes, that monthly candle is a big bear bar! Akin to a bearish engulfing of sorts. Will see what it looks like by month close – if we rally, it could be some sort of long lower shadow candle which would – strangely – be somewhat bullish… unless it forms a hanging man style candle.

  12. Corey Rosenbloom, CMT Says:

    I'm watching 1,150 again which is the Jan high along with the 20 EMA at the 1,130 level. 50 looks to be converging with 1,150 which makes it the key level to watch and perhaps target.

  13. PatientBear Says:

    The other difference is credit spreads – run an overlay of SPX against $USB and JNK risk is clearly out of favor.

  14. Chartanalyse : S&P 500 - Seite 67 - Aktienboard Says:

    […] Chartanalyse : S&P 500 Will February SP500 Pattern Repeat and Show the Future? May 26, 2010: 8:09 AM CST One of my favorite things about technical analysis/charting is […]

  15. Carlos Says:

    Hi Corey.
    I see that too. But i`m looking to ADX above 40 and divergence macd weekly. For that view #Bullish” First it takes at least three step:

    1 – Close green tomorrow?? Why hold RSI ( possible divergence)
    2 – Cash need to close above 1094 ( close hourly above)
    3- Need to close daily above 1115
    Important for me 1063 weekly close below that another bearish signal. Why 1063 here
    http://followmarketrend.blogspot.com/2010/05/sp
    My thought short-term SPX500 http://4.bp.blogspot.com/_MJqKtyMMr28/S_2RFFdwg
    Thanks enjoy the rest of thiw week see you Sir twitter.

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