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Sunday, 2 March 2014

Primary Patterns Weekend Update

All cyclical bull markets on SPX since 1923 have formed one of three primary patterns to define the bull market, and signal when that bull market has topped or is topping out. Those three primary patterns are a rising wedge, channel or megaphone (broadening wedge). I looked at this in detail in a post on 29th June last year, which you can see here. Generally speaking that pattern will run from the beginning to the end of that cyclical bull market. 

Every so often though in a strong cyclical bull market there will be more than one primary pattern, and I followed that post on 29th June with another on 30th June putting the case that we were seeing that happen last year, and that the first pattern, a rising wedge, had broken up with a target in the 1965 area. You can see that post here. For that setup and target to be fully valid a new primary pattern would need to form from the break below the first pattern to the low at 1343, and I have been looking for evidence of that primary pattern at every significant high and low since last June. 

On Wednesday morning I posted that I had failed to find that second primary pattern and was was very concerned that the obvious alternative made reaching that wedge target at 1965 unlikely. I am pleased (and slightly embarrassed) to report that I have now found that unidentified second primary pattern and am wondering how I missed it earlier. 

The current primary pattern is a rising channel from the first higher low after 1343, which makes it a bit harder to identify but is a standard setup, particularly when an IHS has formed, which appears to have been the case here. I have channel resistance in the 1920-30 area currently and rising about 25 points per month, which will put the 1965 target in range in mid-April, into the most common period to see a Spring high in April/May. SPX daily primary patterns chart:
Here is that setup on the weekly chart showing the three primary bull market patterns that have developed since the March 2009 low. SPX weekly primary patterns chart:
However SPX could still very much use the short term retracement that I have been talking about, as overhead room is very limited in the short term by the SPX weekly upper bollinger band, which tends to be very good weekly close resistance, can only rise by an average 10-15 points per week in a strong uptrend, and was tested on Friday with the intraday high being almost an exact hit. We could see a punch over it of course, but as historically such a punch has either signalled an immediate top or a top within 50 points or so, a punch above it here would therefore considerably reduce the chances of hitting 1965 before the next substantial retracement. There is some wiggle room next week however as if the upward trend continues then I would be expecting the weekly upper band to close in the 1878-83 range next week, and would treat an overshoot of up to five points or so as not being a technical punch over the band. SPX weekly chart:
Is there any sign of that short term retracement? Well the spike down on Friday afternoon delivered pinocchios down through the short term rising channel support trendlines on both SPX and Dow, with SPX testing 50 hour MA support yet again at the low. That suggests strongly that we are in at least a short term topping process on both, which would fit with a hit of the weekly upper band. Given the fragile geopolitical setup over Ukraine we may already also have a trigger that could deliver a short term decline. SPX 60min chart:
Current primary rising channel support is now in the 1760-70 area, and that is now therefore key bull market support. What are the odds of reaching my 1965 target? Well unless we see a new world war develop from this Ukraine crisis, which I would consider a very unlikely outcome, I think the chances are good. These patterns have a strong history of reaching target in my experience and the two primary rising wedges that have broken up in the past in the history of SPX both made target, though obviously that's a very small statistical sample. The target area will also come into range in mid-April which is in prime Spring high season, with a few more weeks for markets to realize that the Fed seems serious about phasing out QE3 this year, and that we should therefore expect to see a sharp and substantial retracement start in the next few months. 

I'm not feeling at all well today and there may not be a full post tomorrow morning, though if I'm still not feeling well I'll nonetheless try to post a couple of charts before the open tomorrow looking at the overnight reaction to the crisis in Ukraine. 

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