More SPY Fractals

Today's rebound caught me off guard. I wasn't expecting such a rally. The chart is interesting enough to warrant a mid-week blog post. Here's a chart of recent action on the S&P futures:

After getting whipsawed last week during the initial bounce I spotted a high probability trade on Wednesday when the S&P finally climbed up to 1206 (I had initially predicted the retracement would get here but was impatient and started trading when it only got to 1700). The white curve on the left was flattening out which meant that we would get some downward action and I was hoping for the final wave.

Next day indeed was down. That steep motive wave (orange arrow) resulted in an enormous gap at market open. The pattern played out with a 5th wave. Then we got a little triangle, the pink arrow that says "fooled me". I was expecting that to be the end of the retracement and for the market to continue downward. Instead it rocketed upward. How far will it go?

The first thing I should have noticed was that this wave was flattening out. "Higher lows" as they say offered plenty of opportunities to take a nifty profit. The pattern here is what I call the "golf club". The golf club usually has a few bounces up to a horizontal support line. The thing about the golf club is that it usually ends with a sharp climb upward which is exactly what we got. Here are some other golf clubs:

S&P

Coffee

My observation about the golf club rally is that it is ephemeral. It usually doesn't reach the previous high and portends a steep fall.

My problem was that I was too busy counting waves and wanting them to be perfect. Right now I believe I've seen this happen before:

On the right is the current S&P on a 30 minute scale. On the left is a 5 minute chart from the 11th. I made a horrendous trading error going short in-between the purple and blue circles that day expecting the motive wave to extend. Should have recognized that today but at least I wasn't day trading!

So what happened to the left chart?

This rally eventually retraced .618 of the prior decline. It then bounced a second time and completed a .5 retrace. Finally it bottomed with a big "V". Most interestingly, the length of the green lines is exactly the same.

Let's extrapolate on the current chart:

As you can see from this chart, the S&P futures are already curling over. They hit the .5 retracement today. If that is the top then 1065 is the projected bottom based on the motive waves being the same length. If it manages to climb up tomorrow to the .618 retracement (1170) then 1074 is the target. 1074 would essentially be a retest of the previous 1077 lows. 1065 would actually be our target. Since this would be a 3rd wave we'd still expect some sideways action and a slightly lower low around 1040.

I suspect that we won't see the .618 retracement. The market pretty much returned right to the bottom edge of the big gap. It didn't seem to have enough juice to bridge that gap. Not surprising really.

I suspect tomorrow the market will open down. If the market attempts an opening gap fill then really I think that's an incredible gift to those who want to take a high probability short. More likely the market just tanks and most of us are left watching!