June 22nd, 2012

An important, emerging new positive chart pattern in the S&P

Look at the chart inserted on the June 12 post below, “Cramer and One of My Five Lines in the Sand” and you’ll see the second trendline from the top at 1365.  When the market touched that level on Tuesday, I emailed Members the following yesterday morning:

“Yesterday, the market touched 1363 and then fell back. Let’s see what happens today after the Fed Meeting. We’re not alone in looking at this trigger level and, if there’s any positive signals out of Washington about more Fed easing then all those technicians could launch the next move higher. I, for one, will join the herd.”

Having set that hurdle saved us a lot of money because after hitting that level a couple of days ago, the market pulled back significantly.  If we had bought stocks on the expectation that the advance would continue, we would have been hurt terribly yesterday as near 90% of stocks declined as the market took its biggest hit in months.

Those who make decisions based on the news that the media decides to spotlight each day will continue to be whipsawed.  Yesterday, everyone was talking about double-barreled mauling of the market with Goldman Sachs’ bearish call and the across the board marking down of the major banks’ credit ratings by S&P.  Today, they’re talking about the market’s surprising resilience and how “the ratings agencies are always late”, “when they only reflect what everyone already knew” and “changing the rating on one company is important but adjust the whole industry changes nothing”.

But for those of us who take a longer-term view (like the chart in the June 12 post), we need as much of a downside confirmation before heading for the exits as we needed an upside confirmation.  The chart below identifies those two critical levels: 1360-65 for the bullish confirmation and 1260-1266 for the bearish confirmation.

Chart reading is a dynamic exercise as new data reveal new balances in the continually changing struggle between bulls and bears.  Interestingly, a new chart pattern has emerged as a result of the recent volatility: a flag sort of correction (descending parallel lines) coming off the March high.  Patterns like these are usually constructive as they underscore consolidation (or continuation) rather than reversal.  Furthermore, crossing above the upper boundary of this new pattern as well as the 1360-65 level only solidifies further the strength of the following upside move.

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