SPY Reaches New High and We Take a Closer Look at Patterns

Generally speaking, by the time you recognize a chart pattern, the price movement of the underlying equity, currency or futures contract will probably stop adhering to the behavior of that pattern. Case in point my observation yesterday of the pattern in the top range of the SPY. We entered into what would have been the third repetition of said pattern yesterday. This morning we saw the pattern break down. We should have declined into early morning trading but instead SPY went up and retested yesterday's high. Yesterday's high also happened to be .8c below this year's all time high. Two things indicated that we would break that high. Number one, it is the 4th time we have tested the high. The chances of breaking through a resistance level increase with each subsequent attempt at breaking that level. The fact that we tested it again today gave better odds that we would break it. On top of that, we recognized a pattern that suggested the price would stay below that resistance high. Based on what I just said about patterns, by the time you recognize a well formed pattern, chances are that it will break that pattern. The key to playing a pattern play is to anticipate the pattern before it becomes obvious. So, because this pattern became obvious, more traders recognize it and more traders alter the way they trade to try and anticipate movement. This will ultimately break the pattern as a result of a change in trading behavior. So, with this logic, you were provided with compelling reasons to buy into SPY as it retested the highs. What happened? We broke through resistance and created new highs for 2009. What does this mean going forward? I will post a follow up shortly...