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Thursday, March 7, 2013

SPX broadening pattern

A broadening pattern in SPX turns out to be pretty rare.  Here is the current chart.

I looked back all the way to 1996 and I could find only two other similar patterns.  Here is the chart from 2006.

That one ended with a pretty severe sell off.  Here is one from 1996.

In this case the market did not sell off right away.  It continued higher for a couple of weeks before forming a prolonged trading range. 

I was a bit surprised the pattern was so rare.  The current pattern varies a bit from either of the other two examples.  SPX has experienced a low volatility rally into the pattern more similar to the second example from 1996.  However, the current pattern has steeper trend lines which more resemble the 2006 instance.  Both those patterns touched the 50 SMA unlike the current pattern. There is precedent for a sizable tumble from this pattern.  The market turned down very fast and violently in 2006.  However, there is also precedent for more upside as well.  I think it would be a good idea to be prepared to get more defensive should something come along that prompts a sell off.

I thought the unusually high put/call ratio chart suggested a big move was coming.  Both prior similar chart formations did show a big move.  Now it is up to the market to show us which way that move is going to be.


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