Wednesday, July 15, 2009

S&P 500 Curve Ball: W-Bottom Instead?

As every trader was watching the Head and Shoulders Top formation on S&P 500 index and itching to go short, the market threw a curve ball. Instead of breaking down at the neck line around 875, the index held there for 3 days last week, and on Monday, bam! Tuesday, it took a lower volume rest (still managed to go up), and Wednesday it resumed big upward movement at a higher volume.

Is it possible that, instead of the bearish Head and Shoulders, we may have a bullish Double-Bottom formation?

The pattern we see on the chart seems promising:
1. The right side of W is lower than the left side;
2. Volume throughout the formation hasn't been too great, but it is increasing as the pattern completes;
3. The index has come back to the mid-point of W, which is the breakout point if the pattern breaks out to the upside.

One caveat: Double-Bottom pattern is a trend-reversal pattern. The existing trend immediately before the Double-Bottom was an uptrend. Darn! You could possibly argue that the bigger trend since last September was a one gigantic downtrend, so this formation could serve as a trend-reversal pattern.

Another caveat: High-frequency quant trading is now out in the open, thanks to Goldman Sachs. Just be aware that these computers and servers don't care about you and me, small retail investors and traders.

No comments:

Post a Comment