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Friday, August 27, 2010 - Fractal Market

|Includes: SPXS, SPDR S&P 500 Trust ETF (SPY)

Only time for a quick note at the moment...

The market rallied broadly today with advancers/decliners as well as up/volume to down volume spikingĀ  higher with prices. I posted a chart yesterday showing I expected a three wave pattern to take us higher to fill the gap in the chart. Though the 3 wave pattern shown was a simple zigzag, the market instead chose a different corrective pattern, the flat. The outcome is the same however.

This was exactly what the market needed; a positive day investors can take with them into the weekend, alleviating some of the oversold oscillators, and removing some of the bearish sentiment. However, during bear markets ironically, rallies tend to be "stronger" and spikes in the advance/decline ratio and up/down volume ratio occurring near the end of rallies as bears give in, and bulls pour in, certain the worst is behind them.

Also, there is an interesting fractal that might be in play here. A chart I showed a few weeks ago showed a large flat correction culminating with a possible ending diagonal triangle, or wedge, a common terminal bear market pattern.

Chart 1- SPX Daily Bars - 3 Months

The same pattern may be playing out in a smaller degree.

Chart 2 - SPX 30 Min Bars - 6 days

You can see the fractal repeating pattern, a steep decline, an expanding flat correction, culminating with an ending diagonal triangle, with a momentum divergence.

I will be watching carefully for signs of a break down, or if the pattern alters such that it changes my opinion

Disclosure: Long SPY puts, Long BGZ