Profiting From A Failed Pattern

Last week’s action triggered significant breakouts above long-term harmonic resistance levels is many key markets.  The Standard and Poor’s 500 and individual issues such as General Electric (GE) are exhibiting strong breakouts in distinct areas of harmonic resistance.  The S&P 500 and GE have now violated substantial corrective harmonic price patterns called Bearish Bats.  Although these patterns have contained the action in both for most of the year, the recent rally in each case has started a significant breakout above well-defined weekly harmonic resistance levels that is signaling a continuation of their respective longer-term up trends. 

The breakout action in the S&P500 and the solid weekly close above this year’s prior high at 1160 possesses more technically significant evidence of a major continuation of the rally from the 2003 low.   The Standard and Poor’s 500 has traded in a tight range for most of the year.  The index completed this Bearish Bat pattern early in March but merely stalled until recently.

The Potential Reversal Zone (PRZ) defined long-term harmonic resistance between the weekly 0.886 retracement at 1130 and 1.618AB=CD at 1090.  In addition, the all-time 50% bear market retracement at 1160 complimented this resistance.  

This chart shows a close-up of the recent action of the index with the Potential Reversal Zone (PRZ) (blue) of the pattern’s completion point, the 50% all-time bear market retracement (light blue) and the prior peak for the year (yellow line).

Although the pattern yielded an initial reaction, the failure of the price action to reverse and the fact that it actually stabilized before moving higher are significant signs of the continuation of the primary up trend. 

Such a strong move is quite significant from a harmonic pattern perspective and clearly signals a rally to the next resistance levels.  For the S&P 500, the all-time bear market 0.618 retracement above 1250 (red line) represents the next upside target. 
The next few weeks will provide even greater confirmation of this break out but the harmonic resistance has been violated.

General Electric (GE) is exhibiting a similar situation and is confirming the continuation of its primary up trend with the recent break above a considerable Bearish Bat.

After rallying from its 2003 low, General Electric has consolidated from the prior $34 peak.  The stock recently completed a Bearish Bat pattern on a retest of the $34 level.  After a nominal pullback, the stock is moving sharply higher through the critical harmonic resistance. 

This chart shows a close-up of the recent action of the stock with the Potential Reversal Zone (PRZ) of the pattern’s completion point (blue lines) and the prior peak for the year (yellow line).  Although the pattern yielded an initial reaction, the failure of the price action to reverse significantly and continue above the harmonic resistance are clear signs of the continuation of the primary up trend. 

It is important to understand that harmonic patterns define critical levels of support or resistance where the predominant trend can potentially change.  Although these patterns accurately identify such pivot points, it is common for the predominant trend to violate these defined price levels after a brief reaction of the initial test.  For the S&P 500 and GE, it is important to realize that these break outs are clearly indicating failed patterns at hand.  The next few weeks will indicate the extent of this break out but the rally in these issues are substantial developments that are signaling the continuation of their existing long-term up trends.  

Scott Carney