July 21st, 2010: Update 7 – Diamond Bottom
Posted by pugsma on July 21, 2010
11:55 pm EST: Also, as I showed in my EOD update for 7-20, the inverse head and shoulders pattern set-up also targets 1200 to 1220. So there is a confluence of items stacking up in the bulls favor if they can hold the 1040 level (perferably 1060) over next few days.
11:15 pm EST: There is a very interesting diamond bottom pattern that could have set-up on the SP-500. The pattern follows all of the guidelines established by Bulkowski’s Diamond Bottom.
- Price Trend – Downward leading into the pattern. Check !
- Shape – Looks like a Diamond, but usually one-side tilted. Check !
- Trendlines – Prices produce a broadening formation leading into the pattern and contracting formation exiting the pattern. Check !
- Touches – Prices touch each trend line once or twice. Check !
- Volume – Downward 66% of the time. Check !
- Break-out – Upward 69% of the time. We have not seen the breakout yet, but are close.
- Price Trend – Price makes a near vertical drop into the pattern. Check ! Price will reverse to the level from which it began (1220). Yet to come! Diamonds with short-term (less than 3-months) price trends leading into the diamond perform the best. The drop from 1220 to 1041 leading into the diamond lasted about one and half months.
- Price Velocity – High velocity moves into the Diamond lead to high velocity moves out of the Diamond. We certinaly had high velocity leading into the Diamond.
- Volume Trend – A rising volume trend leads to the best break-out performance. We will have to watch this on any break-out attempt.
The measure rule for the Diamond Bottom reversal is to add the distance between Points A and B (120 points) to point A, thus 1131 + (1131-1011) = 1251 on the SP-500. We will have to watch the lower upward sloping trend line here between 1040 and 1060 to see if it holds as support and produces the strong reversal needed to break-out of the diamond to the upside above the 50-day SMA at 1087. This diamond botttom pattern agrees with my primary E-wave count that P2 has bottom at 1010.91 and we are headed up in P3 (see the SP-500 60-min chart below) and with the fact that SP-500 is poised at a very critical juncture.
It should also be noted that it possible for a Diamond Pattern to act as a continuation pattern at Half-Staff, and therefore a failure could lead to a drop of 120 points to the downside below the B point of 1011 or a target of 879 on the SP-500. Again, it looks like a Diamond Bottom and 69% of the time these patterns break to the upside, but we have to watch it very closely in the next few days to make sure it’s not a continuation pattern (31% chance), which would be very bearish. Recall in my update 6 at the EOD I gave the odds of my bearish count playing out at 20% to 30%. This was before recognizing the Diamond Pattern tonight, so I was above right with that projection.
SP-500 Diamond Bottom Pattern:
SP-500 60-min chart (EOD 7-20-10):
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