Analog Details: April 12, 2012


I’ve been watching several analogs for the past several weeks, and this one is screaming the loudest just now.

As always, an analog makes a lot more sense when there’s a plausible case to be made for the expected path forward.  That was certainly the case last year, when I posted extensively about the 2011 as 2007/8 analog [see: Why Do Analogs Work? Part 2.]  I believe this one qualifies, though there are a few hoops to jump through first.

2010 Rising Wedge
2011-2012 Rising Wedge

The odds of it playing out rise dramatically if the bump we saw Wednesday extends up to 1380-1400 before any further declines.   If so, the bold purple dashed line above — the midline of the channel I expected would stop Tuesday’s sharp sell-off — would make a terrific neckline for a H&S pattern that targets 1305-1317.

Of course, if the neckline holds — probably around April 24-26 — the H&S fails and we head up to 1462 around May 4-8 for the end of the bullish ride.  The H&S pattern is key.

Note that Tuesday’s low was at the .786 of the 1340-1422 rise, making it a perfect Point B for a Butterfly pattern.  Such patterns extend to the 1.272 (1317) or 1.618 (i.e., 1288, which would slightly overlap the Oct 27 1292 high and might be problematic for the EW picture.)

To me, a drop to 1305-1317 seems fairly plausible.  The tricky part comes in calling for a reversal after SPX has fallen 120 points from its recent high.  The timing looks to be early May, and we have a couple of Fed-centric events around then: consumer credit on the 7th and minutes from Apr 24-25 on the 16th.   So, I suppose anything’s possible.

If the analog is still in play, this is make or break time.  Those who, like me, have been resolutely bearish are itching to get the party started.  Sentiment would be fiercely negative.  But, a strong bounce around 1300 would be the signal that the analog is good.

If so, we’re likely to go back and tag the price level of the original apex (about 1462) of the rising wedge we’ve been in since last August.  I’ve seen this phenomenon play out again and again on both large and small scales.

While completion of the Crab pattern which might set up by then would indicate potential to 1489, I believe the .886 Fib of the Oct 07 – Mar 09 decline (a Bat pattern) will step in to prevent a rise in excess of 1462-1472.

But the greater limiting factor is the  bold, red dashed trend line labeled “midline” running through the chart.   It’s an incredibly important TL that dates back to March of 1935, running right down the middle of the channel guiding SPX ever since (it’ll show up on another bigger, more important analog I’m finishing up.)

If all those fairly logical (but, by no means guaranteed) pins drop into place, the lock will click and the door will swing open to all sorts of goodies.  I’ll be watching it along the way, of course, waiting for the whole mess to come crashing down in a heap. Analogs always work — until they don’t.  But, when they do…investing can be a whole lot of fun.

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