What will the U.S. market recovery look like? We don't know exactly, but the history of chart behavior suggests several patterns we should look for, and it involves an alphabet soup of L, V and W shape rebound patterns.
Several factors help shape the pattern. First, is what I suspect will be some form of a further quantitative easing (QE3), be it direct financial stimulus or a further debasement of the U.S. dollar which will help export industries.
Counter this against continued high U.S. unemployment rate of around 9 percent, unmanageable budget deficits and credit downgrades.
When the head-and-shoulder uptrend reversal pattern ends there is no set outcome. The downtrend may continue, or a consolidation pattern may develop. It's the nature of the consolidation pattern that points the way to the future trend development.
The Dow, for one, is in the early stages of consolidation.
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Dow Weekly Chart |
There are five potential consolidation rebound patterns and most of them are bullish. This includes the V- and W-shaped rebounds from support and also the inverted head-and-shoulder pattern. These are low probability because of their directional bias.
The rebound patterns that include a margin for a bearish fall are the most valid recovery patterns in the current market condition. This is the L-shaped recovery pattern shown in the chart. The trading band consolidation is a sideways movement in a trading band defined by support and resistance levels. Often the volatility within the band remains high, although the exceptional current volatility is unusual.
The breakout, when it comes, is rapid because it's in response to a major change in conditions. This might include a policy announcement such as QE3. The breakout target is calculated by measuring the width of the trading band. This can be an upside or downside breakout. Often these targets are associated with historical support or resistance levels. Once the target is achieved the trend often continues. Read more
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