Sp500 Index does an Adam and Eve Bottom

The bullish volume spring came alive in the market today and we are starting to bounce now.  I did a follow post after that one and became discouraged that we would see follow through to the upside because of the poor follow through after the reversal hammer.

After I posted that I began to realize that we had a very classic and beautiful pattern forming known as an Adam and Eve Double Bottom. 

This is part of the problem posting here at BestOnlineTrades.  After I write my thoughts in a posting here I may change my mind a hour later or notice a different pattern and have to change tactics.  So sometimes some of the posts I make here may seem inconsistent with what my ‘real time’ current view of the market is.  I am not sure how to solve that problem yet.  And I am not sure there is a very good solution yet.

Trading requires one to change tactics and change your mind quickly and adjust to the new situation as it develops.  However sometimes changing your mind too much can lead to over trading and too much whipsawing. 

I know that the poor follow through in the sp500 on 5/26/2010 tricked a lot of traders into changing their mind back to bearish.  As it turns out the correct analysis is that we have formed an Adam and Eve Double bottom which is a powerful pattern that can produce add on buying and short covering combined leading to quick upside reactionary moves.

I wish I had remembered this pattern before, but only thought of it at the last minute.  Perhaps it is not a bad idea to keep a collection of all the key patterns taped around my computer monitor so that they are always visible and a constant reminder about what next potential pattern or setup may occur.

The Adam and Eve Double bottom is from hardrightedge.com and the master swing trader Adam Farley.

Having confidence in this pattern, I am expecting the market to rise for the next several days to form a right handle on the current W pattern.  I don’t know yet if it will just be several days.  It may be 10 to 15 full trading days of slightly choppy but still persistently up price action.  I will have a better sense of the time duration obviously as we move along into next week.

So what I am looking for is for the market to once again get into a partially overbought situation again.

I have key levels and indicators I am watching very closely over the next week or two.  I will need to focus like a laser on this new uptrend because I am going to sit waiting and watching for one key signal that gets me heavily short the market again.  More on that in a future post.

But for now this rally should have some follow through legs and climb a wall of fear for a several days to a week or two? 

I am still expecting the market to create a stance whereby it can catapult itself into a massive crash.  It really scares me how confident I am of this.  Usually when I get this confident I turn out to be not just wrong, but horribly wrong and the market does the exact opposite or never follows through.

So, let the rally monkeys do their thing into next week.

And thankfully this rally will provide (in my opinion) the single best shorting opportunity in decades.

The question is how high will the rally go?  I have been thinking there is an outside chance we could slightly exceed the previous shelf high of 1172 and maybe even to a marginally new high level of 1180.

I have already done some calculations on RSI levels that correspond to future possible higher prices and 1150 to 1180 would definitely fit the bill of being the most attractive level to reach for a best parallel of the 1987 setup.

Think about it. 

Such a move would in short order convince a good majority of general market participants and technicians as well that NEW ALL TIME HIGHS are on deck and that we can now all just breath a collective sigh of relief.   The technicians would think so because price broke out northward from the down trending resistance line.  And the public would think so simply because of the fact that prices are near the previous all time high again and create that kind of excitement.

So the higher the better in my opinion.  I don’t wish anyone to get hurt but the market just has this way of tricking the majority and by blasting to 1172 or 1180 it would do precisely that.

It also makes sense when you consider my post about the bullish spring and the adam and eve double bottom.  Because price has failed to take out the lows marked by 1070 it is very typical for price to oscillate back to the previous peak where it tried to break out ( in this case the 1172 level).

It would be even more deviant for the market to hit a new slight 52 week high.  I don’t expect that to happen, but I don’t want to say that it cannot happen.

We are now setting up the final stage for the most volatile market action in decades.  Yes we have already seen high volatility, but I still feel as though we have not seen the true ‘shock and awe’ type of moves that make it to the front page of the new york times.

In order to get that type of action, I believe we need to get to an overbought enough level for it to activate… More on that later…

Posted in Index Trading, Market Timing, SP500
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2 comments on “Sp500 Index does an Adam and Eve Bottom
  1. shrihas says:

    Hi Tom,

    I agree with you. I think S&P will form H&S pattern at around 1140. Now, if you notice, that is also roughly 38% retracement of (1220-1070) fall. If it forms H&S Pattern then it gives a target of 880. Important thing is that is the same target you will get by Elliott. Fall of (1220-1070) *1.6 equals 240. If you subtract 240 from 1140, you get about 900 same as H&S pattern target. At that level of S&P (1140), almost all DEVELOPED MARKET indices are forming H&S Pattern. At that level of S&P (1140) all emerging economies will either have double top or 61% retracement of top. Isn’t it interesting?

  2. Tom Tom says:

    Yes Shrihas that is very interesting. I just don’t know if 1140 will be ‘enough’ though to get the market overbought enough. I really prefer to see 50 to 60 RSI range on the sp500. The higher the market is able to move up based on RSI the more room it will leave for an extended decline. Hopefully next week provides some better clues.

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