“W” Bottom Pattern

We frequently share trading “patterns” with you that have a history of influence in shaping short-term or long-term direction of prices.

For example, our long-term trading patterns were suggesting that a bearish trend was developing over a year ago. That was confirmed in August of last year as the S&P 500 fell below its 10-month exponential moving average – a fairly rare condition.

And even though prices bounced above that indicator during the October rally, the markets have since re-confirmed that long-term bearish signal.

Well, over the last two months the market has struggled considerably, posting the worst January in history. We’ve shown you several charts of that developing bear market. But since the mid-January lows the broad market has also created a “W” bottom trading pattern that suggests a good chance of prices continuing to favor the upside on a short-term basis, in spite of being firmly locked in a longer-term bearish trend.

Check out the “W” pattern for the NYSE Index:

As you can see, the “W” pattern is a fancy way of saying that a double bottom has been developing. The possible follow through of this pattern is to create a right hand tall side similar to the tall left hand side of this “W” pattern, suggesting that the NYSE could advance well above its 50-day moving average but likely stopping short of its 200-day moving average before resuming another bearish downward let.

The next logical resistance after the 50-day moving average (if the NYSE does indeed break that high) would be the lows set in mid-December. Those lows or the 200-day moving average should likely derail any bullish follow-through of this positive trading pattern.

Crude Oil Hits 50-Day Moving Average

While bargain hunting and a rebound in crude oil prices that also shows a similar “W” trading pattern have helped the markets recover nicely this week, buying interest has struggled the last trading sessions (Thursday and Friday).

Much of this is because crude oil prices have suddenly rebounded to the 50-day moving average, which was crossed on Thursday and chopped just below it on Friday.

Crude oil prices for March delivery tumbled $1.13 to $29.64 a barrel on the day amid lingering concerns about a global supply glut. The spot price for crude oil ended the week at $31.96.

Notice the similar “W” pattern for crude oil and the resistance at the 50MA. If crude oil prices can work their way above the 50MA mark then we are likely to see the taller right side of these “W” trading patterns, both for crude oil and for the broader equity markets.

Flat Inflation Edging Up

On the U.S. economic front, the Labor Department released a report before the start of trading showing consumer prices came in flat in the month of January.

The Labor Department said its consumer price index was unchanged in January after edging down by 0.1 percent in December. Economists had expected prices to dip by another 0.1 percent.

Meanwhile, the report said core consumer prices, which exclude food and energy prices, rose by 0.3 percent in January following an upwardly revised 0.2 percent increase in December. Core prices had been expected to inch up by 0.1 percent, matching the uptick originally reported for the previous month.