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August 20, 2008

Pattern Recognition

As just about every technical analyst knows, professional and wannabe alike, the S&P 500 has recently broken lower out of a bear flag. Seeing that the market has thrown quite a few head fakes on daily patterns in the last few months, let's zoom into some intraday views and see what we can decipher. First, a look at the 60-minute SPX:

stock chart

The SPX looks to have traced out a well-formed A-B-C correction. According to Elliott theory, we can confirm this pattern as an A-B-C move if 1275 (the bottom of the A-wave) is breached in any notable way. If the market continues sideways without breaching 1275... and especially if it breaks lower in coming hours... the odds would rise that an impulsive wave down is underway as opposed to a correction. This latter scenario implies significantly lower prices just ahead. There is no need to rush into big positions at the moment. The market should reveal its hand presently.

For its part, the NDX broke higher out of a rounded base earlier this month, but has been struggling to better itself over the past week.

stock chart

One does not want to see multiple attempts at support if one is positioned long. Multiple attempts typically result in ultimate failure. Less than a week ago, we saw another type of bearish failure when a consolidation breakout rolled over, so the NDX is looking tepid at the moment. Should 1900 give way, the next line of defense would be at the top of the rounded base (1875) followed by the July low (1775) and finally the 2008 low (1675). Before you bears get excited, keep in mind that the NDX is better than all other major indexes at throwing curves at significant turning points. Go study the October high for an excellent example. In fact, I may just post an analysis of that high later this week.

 

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