Positioning For A 10 Year Pattern Breakout

ilene's picture

Positioning For A 10 Year Pattern Breakout

Courtesy of Chris Vermeulen

As mentioned last Friday just before things took a dive on the weekend, a look at the major market indices did not look promising. If we take an even longer term look and examine the monthly charts we can see that The S&P 500 as well as the Dow Jones have been approaching multi-decade rising channel resistance lines. Further, they also appear to be forming bearish rising wedge patterns. 

Monthly Long Term Chart Analysis & Thoughts:

Monthly SPX Index Trading

As many of my longer term subscribers can attest to, I always preach that technical analysis is one part  art and one part science:  you can never be completely certain on what the outcome of a pattern is going to be.  However, we can use historical analysis to make better investments. The great American Novelist Mark Twain probably said it best in that “history does not repeat itself, but it rhymes”.  Regarding a rising wedge pattern, we know that roughly two-thirds of the time they will break to the downside.  This also means that one-third of the time they break to the upside.

In accomplishing our goal of capital growth we must do a number of things.  We must make returns on our investments, we must protect our investments, and we must limit our losses.  While all three aspects work in tandem with each other, there are times when focus must be allocated to one specific approach.

Regarding the current technical setup, I’m not so focused on the 67% chance that these wedges will break to the downside, but more so the impact of each outcome on the average Joe’s portfolio and mom and pop businesses.  The S&P 500 and the Dow are approaching long term resistance lines that have been in place for decades.  If we do break to the downside, which I suspect we will, there could be a very significant sell off with consequences that no one can predict.  Alternatively, there is significant overhead resistance in the various indices, and I don’t believe an upside break would be too monumental.

That being said, I always like to keep an open outlook and wait for the right opportunity. As evidenced by the completion of the recent 5 wave uptrend on the S&P that coincided nicely with the various quantitative easing policies, Ben Bernanke and the fed have had less and less impact. I truly can’t see many fiscal developments that would prompt any significant bullish action.

The only scenario I really think that could pump up equities is a series of positive earnings announcements. A lot of expectations, earnings numbers, guidance, etc… have been revised downwards over the last couple of quarters, so there is the opportunity for some positive surprises that could lead to some bullish price action.  In absence of such a scenario, I really can’t think of much else that would prompt a run up.

Look at these charts of positive and negative earnings surprises… and the dates and remember what happened following this negative data….


Positive Earnings Surprise

Earnings Positive SurprisesEarnings Positive Surprises


Negative Earnings Surprise

Earning Negative Surprises

For those steadfast bulls, lock in some profits and/or buy some protection. Missing out on some of the upside is a lot better than losing some of the gains you have fought so hard for over the past couple of years. For the more aggressive traders and investors, start following my updates a little more regularly as I foresee many shorting opportunities coming up in the future.  Sell-offs are often quick and abrupt, and timing is extremely important when playing the downside.

Further, trading could get very volatile in the near future. Historically, and even more so looking forward as August and September have been very costly for the average investor.  Our focus will be in taking the highest probability trades that offer the best risk to reward scenarios.  There will be times when we miss trades, and times when they’re not timed perfectly. But, as those who have been with me for a while can attest to, patience pays off in the long run…

(Ed. note: my new website is here. ~ Ilene)

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bagholder's picture

Shouldn't unemployment rate rise cause the market to drop and earnings drop cause the market to drop rather than the other way around?
Then again, i don't write a newsletter

rsnoble's picture

Actually that entire 20 year chart is 1 pattern. As long as the 3rd peak doesn't climb much higher this pattern has a 75% chance of playing out to the downside which is SP 450.

Only problem is the Fed's hire the best technicians and they see this also and they are desperately trying to avoid it. It's not as easy for them as you may think. We'll see.

At any rate, the economy is going to complete shit and is going to tank big time and it won't matter if it's DOW 30k or DOW 3k. Everyone in the real world knows it's a huge fucking farce and that Wall Street is literally the asshole of Planet Earth.

rsnoble's picture

And btw according to this chart that upper trendline is around 140 level so it won't be long before we know. Thing is it's not like it's going straight down but could start a pattern of lower highs and lower lows, which by now seems impossible.

q99x2's picture

Earnings don't have the same relationship to the market as they did 4 years ago.

If central bankers say the market will rise or fall then that is what it will do until it doesn't. They've got the whole wide world in their hands. They've got the whole world in their hands... But why would they want it?

macdec35's picture

It is always interesting to read an analysis of what who did and what the results in the depression would have been had they done x, y or z.

Given that no one knows, it is just like reading "through the looking glass"

XtraBullish's picture

Great day for us BULLS! BBQ's shorts are my absoluet favorite summer fare especially with all of the gloating that goes on.


Shorts will be wearing long underwear soon. Follow the yellow brick road...


Shorts will be wearing long underwear soon. Follow the yellow brick road...

The Monkey's picture

Not all bears are positioned negatively. Some of us are waiting for the rest of you to pile in.

brettd's picture

Ben's not going to pump.  

Europe will do it for him.

zorba THE GREEK's picture

The long term chart would make one hell of a roller coaster, and it looks 

like the next dip is going to make a lot of people nauseous. 

sitenine's picture

What are you trying to say? Promise of QE isn't good enough for you?

DavidC's picture

As long as markets keep rising on the promise, that's all it will be.


sitenine's picture

So...then, yes?  It's good enough?  Until it's not, and then they do it for real?  And then we wait on the next promise, or what?  We are so fucked.

Savyindallas's picture

criminals manipulating

linrom's picture

I am not looking for a repeat of 2008!

DavidC's picture

I am.

Things are worse now than they were in 2008. Let me know if you want more details.


cbxer55's picture

What do you call what happened today, DOW up 211 points?

What the hell happened to cause that? More fabricating by the Bureau of Lies and Stories?

The Monkey's picture

The central banks can orchestrate a lot of bullshit while you sit waiting for your downside bet to close in deep green. The Fed in 1927 went balls out to prevent a recession. The argument Irving Fisher and others have made is that the Fed should have continued easy money to avoid the depression. That is the script the Fed has been following.

The counterargument made by liquidationists is that monetary slack will inevitably lead to overproduction, overspeculation and greater overhang. We've already seen a ton of this over the past dozen years, so we know the liquidationists had gotten something right.

Don't be surprised if the central banks engineer an even larger top. They have committed so much to this effort that it is impossible to go back now. The slack will have to be so great as to initiate it's own unwinding on velocity, regardless of monetary supply.

spinone's picture

you're right.  the third peak isn't high enough yet. maybe 2015.