SPY’s latest price movement has formed a bullish ABC Pattern. This pattern can be either a bullish pattern or bearish but in this case it is bullish. The defining characteristics of this pattern are:
1. An upward trend (A-B)
2. A retracement of the uptrend, typically a 61.8% retracement (B-C)
3. A move upwards on volume (C-D)
SPY’S AB-CD PATTERN: This pattern has formed in the last couple of weeks in SPY. Since the 5th SPY has rallied to its high at 144.55 where it began its retracement back to its lows at 141.88 which is about a 61% retracement from the highs. Now we are potentially seeing the beginning stages of the C-D move. The potential price target for this move is the equal length A-B leg, which is about 4.13 points. The potential price target for this measured move then is around the high from the fall at 146.21, the actual price target is 146.01.
But for this to happen SPY first make break about the B level at 144.55, this would mean a break of two key resistance levels that hampered the bulls first rally. First would be the downtrend that has formed since September and second is the high at 144.55. The break in these levels would be enough to move the market to the price target. The other part of this trade which is nice is that the D move signals the end of a upwards movement and a potential reversal back down. This would correspond nicely with SPY hitting the highs at around the same time the fiscal cliff gets underway and the end of the year starts.