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Pavlov's Dog Hypothesis
http://spiketradeblog.blogspot.com/2011/10/pavlovs-dog-hypothesis.html

Wondering if and how the market will ever breakout of this trading range?
Well consider my "Pavlov's dog"  hypothesis.
The market just completed its fourth trip to the resistance of the upper channel line.  Each time previous to this it ricocheted sharply, sending prices down to retest the lows.  Just like Pavlov's dog, traders have become complacently conditioned to this cause and effect response – each time shorting a little earlier and putting on larger trades.
So, is this time different?  Perhaps.
Two things to consider:  Price action, and pattern.
Price Action ( chart 1, S&P 500 daily)
<!--[if !supportLists]-->1.      <!--[endif]-->Previous reversals (red arrows) occurred as prices smacked the resistance of the falling 50-day EMA.  Now, however, prices have reversed (green arrow) to the downside following a price break above this – now rising -average which has held for 6 trading days.  Don't forget resistance becomes support.
<!--[if !supportLists]-->2.      <!--[endif]-->Though the market is short term overbought, on low volume, we cannot discount the increased momentum beneath prices - reflected by the MACD lines (red and green highlights).  Previous downside reversals occurred in conjunction with an accompanying reversal in the slope of the MACD lines positioned below the centerline.  The recent rally carried these lines above the Centerline.  Also, MACD lines are poised for a bullish crossover on the weekly chart – an event that will trigger programmed buying.
Price Pattern (chart 2, S&P 500 daily with Bullkowski example of an Expanding triangle)
<!--[if !supportLists]-->1.      <!--[endif]-->The S&P 500 index is tracing an right angle expanding triangle that is near completion.
<!--[if !supportLists]-->2.      <!--[endif]-->As for Resolution?  Bullkowski states that given a "partial decline," upside breakouts occur 63% of the time.
Two Questions:
<!--[if !supportLists]-->1.      <!--[endif]-->Could the newly formed S&P 500 index support serve to "brake" a swoon to new lows, thus forming the partial decline?
<!--[if !supportLists]-->2.      <!--[endif]-->If this were to occur, with all the previously conditioned short sellers aboard, wouldn't it produce a significant short squeeze leading to a high volume upside breakout of this pattern?
Conclusion:
The combination of price action, chart patterns and conditioned trader psychology often times can unlock the secrets to solving puzzling market conditions.  If you are short be aware.  If you are long, don't panic sell into this dip too fast, if you are in cash, be on your toes – Pavlov's dog may have no bark this time.


Stephen M.

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