Matt Trivisonno’s Blog

SPY’s chart, and many other charts, now has an “ascending triangle” pattern (click to enlarge):

If you don’t know what an ascending-triangle is, stop trading until you have read this.

This is a very bullish pattern. My textbook says it resolves upward 90% of the time. After the breakout, SPY could run to $138.

Look at the last five days on the chart. Notice that the volume was lighter and falling on the three down days, and heavier and rising on the up days. That is exactly how it’s supposed to be and is wildly bullish.

You might want to draw your lines slightly different than mine, but I drew the top line (blue) at a nice round number of $129. This is where the shorts have taken their stand. The up-sloping lower line (black) shows that the longs are gaining ground.

Scenarios:
1) Something, such as the unemployment-claims number or the jobs report, causes the market to fall. If the volume is light, and prices hold at or above the black line, then you have a screaming buy signal.

2) If prices push below the black line, then the pattern degrades into a less bullish rectangle.

3) If prices shoot above the blue line, a correction back down to the blue line on low volume is a good place to buy.

4) If your an insane swashbuckler, you might try shorting the next approach up to the blue line. The market is likely to fall back and coil the spring before bursting through, however you won’t catch me trying this short play.

Should the market be rallying while the global economy grinds to a halt? NO!

But will the market rally as the global economy grinds to a halt? It sure looks like it!

Does this make sense? NO!

This is the market we are talking about! It has its own logic!

What kind of crazy, insane logic is that?

Bear market rallies are where the market lures in the bulls and slaughters them.

This triangle will likely produce a fantastic bear-market rally that we can make a fortune shorting a few weeks from now.

Even if the jobs data continues to be bad as I expect, many traders will dismiss it as a trailing indicator. Unemployment is indeed a trailing indicator, however I don’t think we are anywhere near the end of the trail. As the job losses mount in coming weeks, that is very likely the trigger that puts an end to this bear-market rally as the bulls slowly emerge from their delusions.

Note: I’m guessing that the market corrects down to the black line this week. Jim Cramer wrote an article titled “Embrace the Bullish Sea Change” Wednesday after the close, so that will probably mark the crest of this wave.

This entry was posted on Wednesday, July 30th, 2008 at 11:46 pm and is filed under Investing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.