Matching patterns in S&P500 price action - Fore-telling? (AfraidToTrade)

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