Considering last week's commentary has changed little over the past five trading sessions, this week's chart on the SPY will look at a common price pattern that every trader (novice or veteran) should be very familiar with, the inverted Head & Shoulders Price Pattern.
As the chart above illustrates, the inverted head & shoulders price pattern is the classic head & shoulders price pattern turned upside down. Here the market sells off in a series of three spikes lower. The second being the most dramatic (head). Should the market rally back above resistance (neckline) there is a high statistical probability the market will carry on an equal distance (from head to neckline) higher. In this case, the market spiked lower to form the 'Head' at 66.31 (in March '09) then rallied back into resistance which formed the 'Neckline' at 99.65 (by June '09). The subsequent breakout through the 100 level suggested that what once was resistance ought to now become support. As well, it suggested that there ought to be a subsequent move back up into the 125 area.
Upside targets have been
1. a 50% retracement of the entire two year bear market move to 108.755 area (refer to previous blogs for more on this calculation).
2. The weekly gap needed to be filled in at 108.
Now that these primary targets have been hit the easy part is over. The classic 'dead-cat-bounce' has played itself out and it is now not a question of 'when' the market will move higher but really 'if' there is much more in the tank.
Since our simple (yet very effective) moving average signal (13EMA vs. 30 SMA) is still quite bullish, we must remain bullish. Should that relationship change we will change our stance appropriately.
With the above in mind, our next (and far more risky targets) are:
1. the 200 period SMA (which currently sits at or near 120).
2. the inverted head and shoulders price pattern target at or near 125.
3. And ultimately, the top of this very steep price channel (refer to last week's chart for the channel) at or near 140.
My hunch is we are in the 7th or 8th inning of this dead-cat-bounce so I shall be reluctant to put on new positions until a correction in earnest occurs. Yes, I will be looking for the market to move higher over the coming weeks but I just don't think its worth the risk...but I'm just conservative that way. :)
That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com
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