Monday, May 10, 2010

Market reversal setup

On Apr 30 I made this post describing my conditions for the market reversal:

Today's selling

Submitted by Vadym Graifer (1179 comments) on Fri, 04/30/2010 - 15:12 #61968

... is much closer to what I'd like to see for a trend reversal than anything we have had in quite a while. Slow, orderly, sustainable... Not ready to call it full blown reversal yet, but if SPY doesn't go over 121 and loses 118.20, that should do it.

Let me show the setup I had in mind making that call. To provide a background which is fresh in memory today but will be a bit murky for readers in a while, the market had huge rally for about 13 months, and last couple months we had almost no pullbacks - just day after day of relentless upward climb. Search for the reversal and calls for the top, made all too often during whole rally, became almost hysterical. Time and again asked if "we are there yet" I was answering that I saw no signs of reversal. This post above though described a trigger for market reversal. Let's have a look at the chart where you will see a horizontal line showing the trigger:

Looking at the top of the few bars forming the mini-range just above the breakdown line, you can see also where the resistance $121 came from. So, what we have here is: high at $122.12 made on 04/26, sharp retreat next day bottoming out at $118.25, a few days of consolidation forming a range between $118.20 and $121. That's the range that presented the setup mentioned in the call.

From here we had two scenarios. First is hypothetical now: SPY breaks $121 thus invalidating the breakdown. From there would would be watching for possible double top or abandon short idea if new high were made. Second is what took place: support was broken, and the rest is history.
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