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By: Chris Rowe — May 17, 2010

Here's Another Reversal Pattern That'll Make You Big Profits

4-weeks ago, in my article titled "Here's 3 Ways to Stay Profitable Forever", I gave you three bad trading/investing habits to break.  We said the rule of thumb is that it takes 30 days to make or break a habit, but you have to follow through every single day.  It doesn't sound THAT hard.  But in reality it's not easy. 

Some of you left comments saying you would do the exercise.  Did you?  Has it helped?  If so, please leave your comments below. 

You may have noticed the last 3 of my weekly articles were quite bearish with titles like:

More Greek Bull? Believe it and Get Hammered! Short the Squeeze!

Here's How To Profit When The Market Tanks

Disasters Approaching! Here's How to Profit from It ...

But today I'm going to explain why the markets are showing signs of a bullish reversal.  Before doing that, let me just repeat:  "SHOWING SIGNS of a reversal".  Even situations in which the highest probability is assigned to an outcome can turn out to have the opposite happen.

My goal today is mainly to write an educational article about what today's market is telling us TODAY.  Since I write once per week, I should caution you that only members of The Trend Rider will get REAL TIME commentary and trade alerts, while Tycoon Report readers will wait until next Tuesday.  And the reversal patterns and signals I'm about to show you definitely should give a confirmation in Tuesday's trading before we really respect them.  (I'm writing this Monday night.)

Let's get down to business...

The question everyone is asking is:  "Is this the bullish reversal that will complete the correction and continue the bull market, or is it a sign of more selling to come?"

Well the bear case, I think, is quite evident.  The volume is turned up pretty high on that argument.  So while keeping in mind all the bearish arguments we've been hearing, I'll argue the bull side technically.

Here are the strong indications that we just saw a bottom of a correction:

1.  On Thursday, May 6 we saw what the media is referring to as the "flash crash", where the Dow dropped almost 1,000 points and finished the day much higher.  At that point the market seemed to find support at the key long term 200-day moving average.

2.  But since it broke the intermediate term 50-day moving average, we looked for resistance at the 50-day for the new resistance level.  In fact, the 10-day moving average, which had been acting as support since February, was violated in late April, so it too became a new resistance level.  The 50-day coincided with the 10-day moving average, so we had a feeling the market would reverse at that point.  (I sent a trade alert to members of The Trend Rider to buy puts on a certain bank). 


3.  I will get to the dojis circled in blue in a sec.  But first notice, in the intraday chart below, how the market (S&P 500) also rallied 108 points from Thursday's intraday low.  Then, after finding the resistance we just talked about, the market sold off by almost exactly 50% (50% is typically considered to be a key retracement of a sharp move before that move continues in the same direction). 

And if you check the 10-day intraday chart above and the same daily chart of the S&P 500 below (I took away the moving averages so it looks a bit different), you'll notice that after the 50% retracement was hit Monday (intraday), the market strongly reversed higher.  The intraday you see on the right side of the intraday chart above created the doji you see below (circled in blue).

4.  You might remember, on February 16, I wrote an article about the significance of a doji seen after a sharp reversal because it had just happened in February.  The article was titled: "Here's a Reversal Pattern That Can Make You Big Profits".  In fact, the doji I was talking about is in the first blue circle on the left side above.  That was obviously a great call, but keep in mind that the doji formed on February 5th, and I wrote that article 2 weeks later, after the market confirmed the bottom by moving higher.  We also saw a positive divergence, two RSI buy signals (first two green arrows), and a MACD buy signal. 

Today, we also have an RSI buy signal (third green arrow) to work off of, but note that we don't have the same kind of confirmation we had when I wrote about the reversal pattern in February. 

Trend Rider members get the real time thinking and the alerts to accomodate the market's evolution, but anyone reading this should note that while I've typed with a very bearish tone for the last three Tuesdays, today might be the time to start reducing bearish exposure.  We don't need to be outright bullish until we see confirmation of a bullish reversal. 

I'll see you again next Tuesday (if you mail in pictures, otherwise I'll just write to you).  Remember, if you have made the attempt to break any of the bad habits I wrote about 4-weeks ago, I'd love to hear about it in your comments below.

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