sp500 Forming Cup and Handle within Handle of Larger Cup and Handle

Earlier in the day today I started to write a posting here at BestOnlineTrades.com about how I was going to switch to a BOT Short Signal.  But then it occurred to me that I had responded to a comment poster yesterday (JR) and wrote:

If we do not see that then the other possibility is that we trade down tomorrow and then reverse by end of day creating a bullish reversal hammer. I have seen this happen SO MANY times… we get a shooting star and then a bullish reversal hammer the next day.

Then I realized that maybe it would be a good idea for me to actually start taking my own advice so I can avoid excessive whipsaw signals.

I also wrote in yesterday’s post:

The high in April 2010 on the sp500 was 1219.80.   If Wednesday’s trading action manages to hold above 1219.80, then I have to view that as a first sign that today’s intraday reversal was just a head fake and not necessarily a sign of a real reversal.

And this appears to be exactly what happened today.  The market very reluctantly pressed down today towards the previous April 2010 high of 1219.80 and then bounced off of it like a basketball creating an end of day reversal hammer after yesterday’s shooting star reversal.

The occurrence of a reversal hammer the day after a shooting star reversal is an interesting candlestick pattern.  I do not think it has an official candlestick pattern name, but I have seen it often enough that I think maybe it should have one.  It essentially neutralizes the previous potential bearishness of the shooting star reversal.

Also, I should say that there is a slight nuance to these shooting star reversals when a market makes new highs that is very important in my opinion.  There are actually two important aspects.

First is the length of the shooting star tail.  Ideally you want to see a VERY long tail on the shooting star reversal to help the bearishness of the situation.  This is a judgment call and comes with experience.  I would have to describe yesterday’s shooting star reversal in the sp500 as not very potent in terms of its topping tail.  It was not long enough.  Ideally it would have been twice as long or even longer to give it much more actionable signal.

Secondly, when the shooting star candlestick completes and does not manage to close under the previous days close or low, then it somewhat tempers the potential bearishness.

It makes sense.  Think about it.  A VERY long topping tail that makes up the shooting star candlestick is much more effective because it is trapping many more traders and then extinguishing them all in the same day creating higher stakes.

Lastly I should point at that the reliability of shooting star reversals is much greater in bearish trends (bearish weekly and monthly MACD alignments as well as bearish moving average alignments) than it is during bullish trends.

sp50020101208

It is quite fascinating that the market touched the 1219.80 level and then rejected it.  The sp500 now looks like it putting the finishing touches on a small handle from the smaller cup and handle that started in early November 2010.  So we seem to have a cup and handle within a cup and handle pattern.

Right now is actually a pretty low risk long entry point on this market in my opinion because one has clearly defined levels.  Anything below 1219.80 should be considered bearish from here and anything above, bullish.  The levels are clearly defined and I see room towards 1310 to 1410 on the sp500.

We could see a move higher into end of year, then some type of shakeout in early January 2011, then back off to the races as the year starts to roll on.

The end of year time frame is going to be interesting because it will create closing monthly, QUARTERLY and YEARLY time frames.  The quarterly MACD is moving towards a bullish crossover as I write and as long as prices hold ground here or tread higher into end of year, it implies a quarterly MACD bullish crossover once we get into January 2011.

I see no reason to be bearish here.  sp500 under 1219.80 is what needs to happen for any bearish case from this point onward.

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6 comments on “sp500 Forming Cup and Handle within Handle of Larger Cup and Handle
  1. jxxd says:

    I have identified that pattern too. I’ve been looking for them since about June. I call them the Yin Yang pattern. I am starting to formulate the description. Todays pattern on SPX was almost ideal. The two bodies matched very well and the tails go in opposite directions. ( required) I havent studied enough to predict direction. I’m seeing some evidence of shooting star first , hanging man second ( like today) as bearish but thats very preliminary.

    There was one on daily VIX a week ago. I will try to send you a daily chart of BP from this year later tonight. There are a few there.

  2. jxxd says:

    What looks like a hammer at the bottom of a down trend is not the same at the top. In the case of a top the same candle is called a hanging man. By these definitions todays hanging man was partial confirmation of the shooting star. I say partial because we had a lower high and a lower low, but closed up from yesterdays weak close. Full confirmation would have come had we closed lower. All candle patterns must be confirmed by the following candle.

  3. ed says:

    Thursday is rollover day for the E mini contract into March 2011. Frequently this is a down day in the market

  4. ed says:

    Also, there is talk of a filibuster on the tax cut bill. Not good

  5. JR says:

    First I don’t think I made my self clear in my last post when talking about waves I was referring to the E-mini S&P 500 Futures.
    I have been looking at the Wilshire 5000 close. It is interesting yesterday we had a bearish shooting star, and today perhaps a small hammer. To me this pattern indicates that neither the Bears nor the Bulls had much conviction.
    I really think we need to see how the market behaves tomorrow (12/9). It may be the bulls last stand for a while, with a weak up collapsing into a mini sell off. I reach this conclusion, since the bulls don’t really have a lot of energy left. This seems to be what the market told us today (12/8).
    Fascinating, isn’t?

  6. Tom says:

    The appearance of lack of energy from the bulls is what honestly makes any uptrend so difficult to believe sometimes.

    It has tripped me up many times. The market trickles up drip by drip with only a few 100pt up days but rest of the time just drifts around. I suppose it is the nature of an uptrend to be that way.

    I think the last 4 or 5 days have been a running correction and is the reason for the slow action. Looking for another surge into new year.

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