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Will This Pattern Repeat Itself?

January 24, 2014 By Steven Place

It's been a while since we saw proper downside followthrough in the market.

Normally any significant day to the downside has been met with buyers or at least a tepid response. So here we are, getting a little bloodletting in the markets.

But it's forming up the same dip-buying pattern that worked out in November and December:

spx

This pattern is what I call a "failed lower low." This is where there is a key pivot support that is breached, causing some swing traders and investors to stop out of their positions. Once that supply is cleared out to those willing to buy, the market rockets back up higher and retests the top of the range.

If you've ever used an obvious support level as a stop loss, you know what I mean... it's that reversal once you're out of the trade that frustrates the heck out of you.

It's happened over the past 2 months. And here we are, with the S&P breaching a key level of support. I can't guarantee that we'll see the same pattern, but if we do it will embolden buyers (once again) to retake control and go for a retest of the upper range. If buyers fail to appear, then we will most likely go retest the previous month's range, around 1780.

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