Technical Tuesdays: Failing Rallies

For the most part, I find chart patterns interesting but often have a low predictive value. There is, however, considerable contextual value to them.

The current pattern for most stocks and indices are such a case as they strongly suggest one of the infrequent but useful patterns - the failing rally.

The sequence goes like this: Market makes a new high; market experiences a correction phase but does not complete that correction phase (neither in time nor in depth); market rallies back toward the highs but falls short. (Market then goes back down to (or below) the correction lows.)

Using SPY as our market proxy, the chart on the left shows that we may be experiencing just such a pattern.

Investment Strategy Implications

Failing rallies are born out of unresolved market corrections. Failing rallies have two characteristics: they come off weak bottoms and they are accompanied by weak breadth and strength. The first part of that equation is true, the second is not (at least not completely).

However, on this second point, I think it is fair to argue that we are in changed times (see yesterday's entry below). And that liquidity and leverage in the hands of the numerous new players in the game (hedge funds, in particular) have distorted many traditional analytical tools as correlations and momentum have gone to extremes. In other words, synchronicity is the current market order.

If last week was a failing rally (and I would put the odds on it), then the second down wave is the likely next move.