"... you nailed the low or where to cover in spx. how did it work out so close to the chart targets?"


I wrote a Trader's Corner piece last Friday among my other writing where I pointed to an expected downside target for the S&P 500 (SPX) pullback; the correction dating from the week of 5/24. I also wrote that I didn't have LOWER price targets in SPX than 1600-1596, anticipating a move to this area could be followed by a strong rebound. And, a very strong rebound it turned out to be.

There were two principal ways to measure a target to 1600-1596.

1.) Once the extent of the decline into point 'a' on the SPX (60 min) hourly chart below was known, once it ended, we knew that this first downswing measured 52 S&P points from its 1687 intraday high to its 1635 intraday low. One rule of thumb for a correction in a strong primary uptrend is that the index commonly traces out a down-up-down pattern; the letters 'a', 'b' and 'c' are noted at the end of the 3 price swings; end of the first decline is seen at 'a', the end of the upswing ends at 'b' and a second decline ends at 'c'.

Last week I did some back of the envelope highlights on this first chart reproduced here, which reflects the Friday Close of one week back: 5/31/13.

I noted that the second decline is often longer than the first by a Fibonacci factor of 1.5 to 1.6 times the point drop of the first downswing; downleg 'a'. Since this first decline was 52 points in SPX, it sets up an initial further downside projection of 52 X 1.5 subtracted from the top of up leg 'b'; i.e., to 1596, of my projected support target of 1600-1596.

No rocket science here, just a simple formula so to speak, for the common pattern taken on by downside corrections. I have to define this bit more to say, the common pattern of counter-trend pullbacks within a primary/major bull market. We frequently see the a-b-c correction pattern but usually within the context of an overall up trend.


To finish out where SPX's down leg 'c' ended, this is seen on the same hourly chart basis below only with price action up to date reflecting the most recent SPX daily Close (of 6/7/13).

Besides the fact the recent SPX low at 1598 is within a hair's breath of a 1596 target for the 'c' wave decline, there's also the intersecting bullish hourly up trendline that comes in near 1600, where strong support/buying interest came in.

We see certain other bullish chart/technical patterns forming AFTER the apparent upside reversal from the 1600 bottom which tends to 'confirm' that yes, folks THAT WAS the bottom!

The first strong bullish pattern on the rebound was seen where I've noted a 'breakaway' (upside) price gap. The second pattern that developed was the bull flag formation. The breakout above the top end of the traced out 'flag' suggests further strong upside follow through buying is ahead.

2. Another charting method suggests key support and resistance areas within an up (or down) trend. An example is the uptrend price channel traced out in my next SPX chart; seen now on a daily chart basis. In the case of the bullish Uptrend line or the low end of the bullish uptrend channel, the trendline intersected this week in the 1600 area. Just where the decline turned around and reversed into a strong rebound.

You also may have heard technically-oriented analysts or media talking heads talking about a 'test' of the SPX 50-day moving average. That's not insignificant because many more portfolio managers track the 50-day moving average than will construct (and readjust as needed) up or down trendlines.

SPX's up trendline, currently intersecting around 1600, is 'well-defined' in that a good number of lows have formed on the straight uptrend line seen below. With a well-defined trendline the greater is the likelihood of success in taking on bullish positions on declines into those intersecting points.

Perhaps well success can occur in adopting bearish strategies at or near the top end of a broad uptrend price channel such as seen in the area of the recent 1687 peak. Adopting counter-trend strategies in a bull market is jack be nimble, etc. An even stronger sell 'signal' at the recent top was to have noted the key downside reversal that was traced out on the day of the aforementioned SPX high at 1687; i.e., a decisive move to a new High (especially after a prolonged advance), followed by a sell off causing a Close BELOW the prior 1-2 days' Lows.


A decisive upside penetration of the 21-day moving average would be a next milestone in a strong recovery move.