Let’s take a look at the prior four traps that led to new highs:

What I’m showing is the daily S&P 500 from early June, 2009.

The highlighted regions represent the unyielding price rise (almost literally straight up for 8 or 9 days at a time) that came directly after a classic breaking of support via the 20 (or 50) period exponential moving average.

Generally, a break in a moving average triggers sell orders in the expectation that support is broken.

Stop-losses are placed above the entry (usually back above the average) and any sort of upward movement triggers a vicious cycle where stop-losses become “buy to cover” orders, further driving prices higher with buying pressure.

A Bear Trap is thus sprung when a valid or classic sell signal is generated and then price moves upwards into the ‘pocket’ of stop-losses from the short-sellers.  To be a bear trap, a valid sell signal has to occur.

1.  The Head and Shoulders Pattern neckline was broken, in addition to price breaking under the 200 day SMA, generating a very powerful sell signal… that led to an even MORE powerful rally when the signal failed.

2.  A break of the 20 day EMA after a strong selling bar (down-day) triggered entry… and as price moved higher back above the 20 EMA, a flood of stop-losses helped drive the index higher four days in a row.

3.  Using the exact same logic as before, but this time the “Melt-Up” avalanche yielded almost 9 up-days in a row with only a one-day doji pause.

4.  This time price broke solidly on another strong selling bar under the 20 EMA, but technically supported off the confluence of the 50 day EMA and the lower Bollinger.  Still, the rise back above the 20 EMA coincided with another (almost) 9 day price rise with only a minor pause.

5.  It looks like it’s happening again, in that a break of both the 20 and 50 day EMA triggered in more short-sellers… and now we’re having their stop-losses taken out yet again which - if history since July is any guide - will lead to a new price high in the S&P 500.

Take a moment to read my prior post entitled, “A Look at the 12 Most Recent Failed Sell-Signals in the S&P 500” for additional, detailed insights.

There was a similar post I wrote entitled “Recent Failed Sell Signals and Short Squeezes in the SPY” which is a prior discussion on this concept.

Also, this post is almost identical to my ‘prediction post’ of the same logic that forecast the most recent price highs - “If History Repeats, Will it Mean New Highs for S&P 500?”

Be aware of the current “character” or behavior of the market and realize the nuances like this that can help prevent losses or translate into gains.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Let’s see the daily chart spanning back to the beginning of 2009… and witness the stellar drop from $25 per share to $9.

In the prior post on October 28th, I remarked:

“If the prior trend continues, then we will be looking for a price move down to test $9.50 or $9.00 in the next few weeks - provided that the $12.00 level holds as it seems to be doing as resistance.”

The $12 level did indeed hold and price did fall to close Friday just a hair above $9.50 and could test the September lows at $9.00 to try for a ‘double bottom”… or worse yet a new price low.

Beyond the price pullback to the $9.50 level, I wanted to share a lesson about the arc failure pattern in August.

Even without me drawing the arc, it is clear that price was attempting to form a “Rounded Reversal” or “arc” pattern formation (also called a “Saucer” or “Scallop”).  Generally, these are bullish reversal patterns that form near the lows of a major price move.

In general, it’s impossible to call the exact bottom of a rounded reversal pattern, but more than not they do lead to trend reversals.

However, when they fail, they can fail very hard, as the example above in UNG shows us.

UNG began to form a rising arc, looking like the pattern was complete in June and August 2009… but when price broke beneath the arc, a down-move was sharply accelerated by this pattern failure.

It’s one of many examples where a common pattern forms and when the pattern fails, throwing the traders who expected a reversal off balance, it often leads to a swift, sudden and often powerful move in the OPPOSITE direction than is expected… in part due to stop-losses being triggered.

I think this is an excellent example to reference for your studies on a failed “Rounded Reversal” or arc formation… and how powerful price moves can occur at these failures.

To see a successful example of the “Rounded Reversal” leading to a trend reversal in Crude Oil, see any of the following posts in chronological order:

December 30, 2008:  Volume Surging in USO and DXO Oil Funds

January 20, 2009:  Possible Reversal Up in USO Oil Fund and Crude Oil

February 3, 2009:  Rounded Reversal Taking Shape in Crude Oil

March 21, 2009:  A Quick Look at Crude Oil and the US Dollar Index (where I called a target for Crude Oil to be at least $70)

The Rounded Reversal is one of my favorite patterns, as it is often very easy to spot and trade.  However, there is no pattern that works 100%, and in the event that a popular pattern fails, it can leave you an even better opportunity to trade in the opposite if you are aggressive and nimble enough to do so.

Let’s see if price can form a double bottom on a positive momentum divergence… or if the pervasive downtrend will crack prices to yet another new low.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Let’s take a look at Goldman Sachs’ daily chart to note the overhead EMA resistance that is bearing down to form a potential Bearish Cradle Sell Signal… and then temper that bearishness with a look at the Weekly Chart.

Just doing quick commentary here, Goldman Sachs (GS) is underneath both the 20 and 50 day EMA and has formed a lower swing high, which is the first steps in beginning an official new downtrend.  We’re not quite there yet, as the EMA structure is still positive, and a single lower low does not a trend reversal make.

But Goldman has to prove itself and claw its way back above these EMAs, or else a Cradle Sell signal will trigger and these EMAs could hold as overhead resistance, locking in a lower swing high and further deteriorating the upward movement.

A Cradle Sell Signal forms when the 20 period EMA crosses under the 50 EMA, as  price rallies up into this “confluence crossover zone” of the EMAs, forming a potential “dual-wall” of overhead resistance.  A doji or some other reversal candle would be the official ’sell short’ signal if these EMAs cross.

If price stays low, it looks like the EMAs will crossover bearishly at the $175 level, so let’s all watch that very closely for clues as to the potential pathway of Goldman for the future… and perhaps the XLF (Financial ETF)… and by proxy the general market.

But wait, there’s more!

If the daily chart looks like Goldman Sachs is about to fall into the abyss… the weekly chart is showing a nice ‘go long’ confluence moving average buy signal.  What?  Let’s take a look.

The 20 week EMA rests at $167 and the 200 week simple moving average rests at $164, forming a loose confluence zone at the $165 level as expected (and potential) support.

For now, and if Goldman closes to end the weekly candle to where it is now, then we would have a doji that has bounced off confluence support - a buy signal.

That’s the simple analysis and it throws a monkey wrench into the plans and hopes of the bears/sellers.

Additional analysis shows a negative volume and momentum divergence on the weekly chart for almost the whole duration of the rally in 2009 - that’s a bearish non-confirmation of higher prices and tilts the odds slightly to the bearish camp.

So we have resistance on the daily chart at $175 and support on the weekly chart at $165.

This is similar to the situation I highlighted occurred for IBM in my July 24th post:

“Daily and Weekly Conflicting Opportunities in IBM.”

I then followed-up on August 24th’s:

Updated Post on IBM Shows Why Multiple Timeframe Analysis is Critical.

The Weekly Bullish Signal in IBM overpowered the Daily Sell Signal in that example.

I also highlighted a similar pattern on RIMM in the June 30th post:

“Bullish or Bearish on RIMM?  Depends on Your Timeframe.”

Like IBM, RIMM also took the bullish cue from its weekly chart, rallying to a new high in September… before collapsing back to $60.

Will it happen again in Goldman Sachs?

Watch $175 for a bullish breakout and $165 for a bearish breakdown to see.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Here is the current “pure price arc” in gold’s daily chart:

From the last update, gold has bounced strongly off the arc updated from prior post.  Its angle of ascent is still climbing higher, which can be measured by drawing trendlines under each new swing low and noting the angle that each trendline - connecting two swing lows - creates.

See the prior “Angle of Ascent” update contained the recent rising angle measures for these trendlines.

In general, commodities can have a higher tendency to form these ‘parabolic moves’ than stocks because parabolic moves in commodities are generally driven by scarcity or fear (think of the 2008 run-up in crude oil - and the “end of oil” thesis that circulated) , while parabolic moves in stocks are generally driven by greed (”I have to buy now at any price!”).

Still, the analysis, and expected benefit from watching this trendline comes from two factors:

1.  Watch for price to bounce/rally off tests of the lower ascending arc, as occurred recently

2.  Watch for a breakdown of price through the arc to hint that a deeper than normal retracement might be ahead

Ascending or parabolic moves cannot continue forever, and - to an extent - the larger the rise… the harder the fall.

Keep this on your trading and analysis radar!

For current Elliott Wave counts on gold from Robert Prechter’s Elliott Wave International, sign up for their free-week (access their analysis and forecasting reports for free) which ends November 11th.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Barry Ritholtz of the Big Picture shares two graphs of US Unemployment - one from 2004 when the unemployment rate was 5.5% and the other now from 2009 when the unemployment rate is 9.8%. Very revealing.

Dr. Steenbarger of Trader Feed wrote two posts, one on “Trading and Response Inhibition” and the other on “Trading and Mood” which are certainly worth referencing.

I must give credit to Bill Luby of VIX and More for sparking a new idea in me - that of Reverse Engineering a Critical Moving Average. Read the post for his insights and current level to watch in the market for a potential turn if broken.

John Forman of the Essentials of Trading shared two recent blog posts that I wanted to highlight. First, a discussion on “Correlation Analysis for Trading Positions” and then a response to readers asking for specific “Buy and Sell Recommendations” (with his advice to learn to trust yourself).

Advice with which I agree strongly from Adam Warner of Daily Options Reports as he shares his thoughts on “Calling Tops and Bottoms.” A preview quote: “If your goal is to look brilliant, by all means, call turns. If your goal is to manage money well, you’re better off joining in [the turn] later.”

From the Stock Chartist, we see a “Stock Market Roadmap” that takes into account current trendlines, moving averages, price patterns, and ‘end of month’ patterns.

The Tischendorf Letter shares a video with Mike Coval interviewing Howard Lederer with a discussion on “Trading and Poker” in which the following quote originates, “It’s not about winning huge pots. It’s about losing less when you lose and winning more when you win.”

From the Dividend Growth Investor, a story of the “Dividend Investor’s Journey” with a range of thoughts to consider when thinking about dividend-style investing for the long-run.

(Click for full-size image)

I’m just using the tool in its most basic form above, starting with the November 2008 lows, dragging to the January highs, and then dragging back down to the March 2009 lows to produce the classic pitchfork.

We see that the entire price rally has been roughly contained within the upward sloping angles of the Pitchfork, as seen mainly by the 50% median (midpoint) line and how price has snaked around this level.

You can watch median lines for support or resistance (short term) as seen by the ‘tests’ of this level in both directions.

The most recent shallow retracements have found support just above the 50% line, and on the most recent pullback, price found support almost exactly at the middle line, as it appears price is still going to remain within the upward sloping angle throughout the whole rally.

Look to see if there’s ever a break to the downside of the Median line, currently situated around 1,050 and rising, as that will potentially signal a change in market character just as the upward break from the down-sloping trendline that occurred shortly after I posted the May 13th down-trendline update.

For prior posts and additional insights, see the following S&P 500 updates:

October 19th Andrews Pitchfork Update

July 28th Andrews Pitchfork Update

June 18th Update (a special variation using closing prices instead of spikes)

May 13th showing long-term Down-sloping trendline that was broken which signaled change in trend.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

September 23 SPY 5-min:

We’re looking just at the Price and the TICK as well as the 20 and 50 period EMA which help define price structure.

The general pattern for most Fed Days is to expect some type of morning gap and early movement and then expect the ‘lunch period’ or afternoon period in the hours prior to the 2:15 EST announcement to be tightly compressed as traders hold their breath for the announcement.

Then, the announcement comes and there’s often a three-thrust move that happens sometimes far too quickly for most traders - especially new traders - to get on board.  Losses can mount very quickly if you’re positioned the wrong way and caught in these currents. It is generally advised for newer traders to avoid trading the actual announcement for this reason.

Price rallied sharply on the announcement and then tried to support on the 20 and 50 period EMAs before plunging to new intraday lows at the close.  That was the main similarity in the prior Fed day and today’s.

November 4 SPY 5-min:

Today’s action was a better reflection, in that we had an overnight gap that slowly gave way to the tight range prior to the announcement, and then the market fell, rose, fell, rose… tried to support on the EMAs and then collapsed into the close.

I explained this pattern last night in more detail in the Idealized Trades subscriber report and even showed a more detailed chart of the prior Fed Day.  It’s amazing how similar those days were, particularly after the morning session.  September drifted up; today drifted down, but both compressed into a range prior to the announcement.

Just food for thought and an example of history repeating.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

During that time, you will receive access to the three-times per week “Short Term Update” which covers the stock market indexes, gold, treasury yields/prices, and silver markets along with the US Dollar and Euro Elliott Wave forecasts.

They are also offering the October Issue of the Elliott Wave Theorist service, written by Mr. Prechter in which he expands on his current views and forecasts which have garnered a fair bit of headlines and controversy.  This is your chance to see for yourself what Mr. Prechter is saying in his reports.

This issue features “14 eye-opening charts across 10 analysis-packed pages for today’s most critical markets.”

Also, they are providing access to the November 2009 Financial Forecast which is a broader perspective piece across various markets.

This episode includes “A thorough Elliott wave perspective on the stock market today — what does Elliott tell us about the current juncture?” along with current insights on momentum, chart and bar patterns, and trading volume.

Visit their “more information and sign-up” page to start your trial and see what membership is like at one of the largest financial forecasting membership services.

My appreciation to the Staff at EWI for allowing me as an affiliate member to share this opportunity with you.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

First, let’s take a look at the regular or arithmetic scale, which keeps price changes (dollars) constant in the scaling:

(Click for full-size chart)

Using a simple trendline moving down into the 2008 lows, we see that price broke upwards from the descending trendline on December 8th, 2008 with a gap through the line.  This occurred at $74 per share.

As price rose through 2009, we see another simple trendline that connected (roughly) the five swing lows that was broken to the downside officially on October 28 as price broke beneath $180 per share… though it was marginally broken slightly earlier.

What might a logarithmic view of this same time period have showed us?

Next, let’s compare the logarithmic chart, which places more importance on percentage changes (keeping percent moves constant):

(Click for full-size chart)

The benefit to logarithmic charts is that we are comparing percentage moves instead of pure price moves.  Thus, a $1 move on a $1 stock would be a 100% move as compared with a 1% move as a stock moved from $100 to $101.

Logarithmic charts are often used over longer time periods when large price swings or percentage moves in price have occurred.

The trade-off is that we compress the upper range in price and expand the lower range, highlighting (or exaggerating) smaller dollar moves.

How does this then translate into trendline analysis?

Goldman Sachs broke the descending trendline slightly later with the second upside gap that occurred also at the $80 level on December 17th - that’s 9 days later than the arithmetic scale.

What about the rising trendline?

We can actually draw a better trendline - labeled the “first” trendline, which price broke in Mid-August at the $160 per share level.  This did not forecast a reversal, and a second trendline connected the September and October lows to the prior 2009 lows.

This trendline was broken as price was at the $190 level on or around October 16th - roughly 12 days prior to the arithmetic trendline break.

General Principle

This example of Goldman Sachs (GS) gives us a general principle to follow:

Downwards Sloping Logarithmic Trendlines are broken LATER than similar trendlines on Arithmetic Charts;

Upwards Sloping Logarithmic Trendlines are broken SOONER than similar trendlines on Arithmetic Charts.

Sometimes these ’sooner’ trendline breaks result in false signals… or just signals that are well in advance of their arithmetic trendline counterparts.

Because this is a daily chart, we’ll see only slight changes between the two charts, but this effect would be magnified over longer periods - making the difference between signals in months instead of days or weeks.

Both have their uses and neither is superior to the other in price analysis.

However, this is a distinction you need to know when applying long-term trendline price analysis.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Speaking from a daily exponential moving average point of view, we see that the Dow Jones actually remains above its daily 50 EMA - which now rests at 9,670.  The Dow Jones is currently the last of the major four US Market Indexes to hold above the 50 day EMA.  The Russell 2000 has fallen (broken) the most beneath its rising average.

Any break beneath that zone will likely be met with further selling in a deterioration of the uptrend bias.

The lower daily Bollinger Band rests at 9,665, giving us a confluence zone to watch at the 9,660 level for a possible support bounce… or an early reversal signal on a failure beneath this level.

To the upside, we have the 20 EMA at 9,850.  This could hold as resistance, or if broken, would clue us in that odds then favored for a retest if not exceeding of the 1,0100 October high.

Underneath these levels, we see a lengthy negative momentum divergence which appears on all four US Market Indexes.

More importantly, we see a deterioration (non-confirmation) of Breadth, or in the difference between the daily NYSE Advancers and Decliners.  For deeper explanation of that concept and bearish, non-confirmation, see my prior post “Daily Market Internals Now Failing to Confirm Market Rally”.

Again, we have volatility ahead of us thanks to a Wednesday Fed Meeting announcement and a Friday morning Jobs Report.

Stay on your toes and don’t get complacent in either direction this week.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade