TODAY'S ACTION

Another last-hour WTF moment…great. Just when you’re about to wrap things up, a power rally shows up busting through the door at the end of the day. I’ve been in cash the whole day (still am), so it didn’t make any difference to me. The action at the end of the day brings the SPX close to the 50% retracement level, or the halfway point between range support and range resistance located between 855 and 920.

The SPX also closed above the 50-day MA, but it must maintain itself above the 50-day by not breaking down during a consolidation period like it did mid-December. At this point, we need to see a solid breakout above 920 SPX. Keep in mind that we do have major overhead resistance.

I stepped back and looked at the 4-month chart for a while and noticed that we formed a “Pipe Bottom”. These formations don’t occur as frequently as flags or wedges, but they are highly reliable. A pipe bottom is formed when there are two large spikes right next to each other after an extended decline. In addition, the volume must be high on either one or both of the pipes.

Statistics show that bear market pipe bottoms have a 4% failure rate and an average gain (rally) of +32% which makes this a highly-reliable pattern (as we can already see). 23% of these formations have gained in excess of 50%. This is one of the few patterns that are confirmed “after the fact”, however, the point is not to say “duh”, but to get some sort of price target.

What’s interesting is that we also formed a seagull pattern. This pipe smoking seagull is about to get HIGH. Keep in mind that this is a “short-term” bullish reversal, which means that it will most likely be a temporary fix and we will test the 750 lows. It is unlikely that this is the THE bottom like many have been calling recently. However, it doesn’t hurt to partake in the rally until a good shorting opportunity presents itself.

We still need some confirmation because the holiday volume just doesn’t confirm any type of price action when more than half the players aren’t even participating.

Here are the details:

SPX 10-day

SPX 40-day

SPX 4-month

For more on the Pipe Bottom, read Bulkowski's 964-page Encyclopedia of Chart Patterns.

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