Profiting From A Failed Pattern

• November 15, 2004
• Scott Carney

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