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Never look at the Markets the Same Way Again!

Standard and Poors 500

Despite the recent pullback, I believe it is important to review the long-term
significance of the action in the Standard and Poors 500 index since last years
low. From a broader view, the index rallied in March to take out the weekly
Bearish 50% retracement @ 1120. In fact, the weekly price action has formed a
distinct 5-0 pattern at this retracement. This structure has developed in each of
the last four bear markets that declined more than 30% going back to1974. This
is significant for two reasons:
1. The breakout of a 5-0 pattern typically results in
an accelerated move to the 88.6% retracement of
the measured leg, regardless of the time frame.
In this case, the weekly chart points to the 88.6%
retracement level at 1475.

2. This historic precedent defines price limits for the

current market, as the S&P 500 pullback in each
of the prior cases did not retrace any more than
50%. Currently, this would establish the 940 area
as a make-or-break support point.

Standard and Poors 500 (^GSPC): Weekly

Bearish 5-0 Violation
Historically, the S&P 500 has experienced accelerated price action after testing
the 50% retracement area of a prior multi-year bear market. The index is
currently rolling over despite taking out the critical 50% level. I discussed the
significance of the violation of the 5-0 pattern in my book Harmonic Trading:
Volume Two and a free .pdf of the pattern can be downloaded from my website,
HarmonicTrader.com. http://harmonictrader.com/50pattern.htm

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Never look at the Markets the Same Way Again!

Although the short-term resistance factors have capped the current rally,
this will provide an excellent opportunity to strategize long-term positions with
respect to this historic precedent. I have analyzed prior bear markets of the past
40 years in the S&P 500 index. There have been four major market declines that
have exceeded 30% and formed a bearish 5-0 pattern structure following the
completion of their respective ultimate low. In each case, the price action rallied
to the 50% area and reacted nominally on the first test of the pattern' s
completion. However, this structure served only as temporary resistance. In
each case, the eventual breakout resulted in a decisive rally to the corresponding
88.6% retracement. The following charts outline each case.

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Never look at the Markets the Same Way Again!

Standard and Poors 500 (^GSPC): Weekly

Bearish 5-0 Violation 2004
In 2004, the S&P 500 formed a distinct structure on the weekly chart. After losing
nearly 50 percent of its value, the S&P 500 rallied sharply from the 2002 low. The
price action tested the 50 percent retracement at 1160 and reversed
approximately 10 percent over the course of a few months before resuming the
multiyear up trend.

The index was able to rally to the weekly 88.6% retracement. Despite an
eventual collapse that resulted in an entire retracement of this rally, the breakout
in 2004 accurately defined the predominant trend for the next three years. In the
same manner, the current situation in the S&P 500 is clearly pointing to further
upside with an eventual test of its relative 88.6% retracement.

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Never look at the Markets the Same Way Again!

Standard and Poors 500 (^GSPC): Weekly

Bearish 5-0 Violation 1988
The price action following the crash of 1987 possessed the same structure as in
the 2004 example. The market tested the Potential Reversal Zone (PRZ) of the
pattern, reacted nominally after the completion and rallied decisively after the
initial reaction. The interesting aspect of this situation is the accelerated breakout
that occurred following the violation of the pattern.

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HarmonicTrader.com

Never look at the Markets the Same Way Again!

Standard and Poors 500 (^GSPC): Weekly

Bearish 5-0 Violation 1976
In 1974, the market was cut in half from its peak. Following the devastating
decline of the 1973-1974 bear market, the index formed a 5-0 pattern structure
on the weekly chart. The price action reversed briefly at the initial completion of
the pattern. The index rallied above this reaction peak and eventually tested the
88.6% retracement within a few years after the initial breakout.

The index did pullback nearly 50% for most of 1977 before reaching for
the upside objective. It is common for the retest of a prior Potential Reversal
Zone (PRZ) to occur after being violated. The 1977 situation defines the pull
back limit within this historic precedent. However, the current state of the index
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HarmonicTrader.com

Never look at the Markets the Same Way Again!

must not retrace much further or it will negate this weekly technical phenomenon
and long-term upside bias segment. Therefore, the 940 area defines the makeor-break long-term support. These weekly charts are excellent examples of
history repeating itself. Currently, the index is sitting at a critical harmonic
resistance level but possesses clear historic limits to dictate the long-term trend.

COPYRIGHT HARMONICTRADER.COM, L.L.C. 2010

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