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REVERSAL


The S&P's Weekly 2B

03/17/05 08:01:20 AM
by David Penn

Relatively unconvinced by the 2B top displayed on the daily S&P 500 chart? Try a weekly chart on for size.

Security:   $SPX
Position:   N/A

Whenever I hear a top trader or technical analyst refer to a setup or pattern that I feel I have an excellent grasp of, I always feel a tinge of anxiety. Either I'm going to find myself in agreement with the Master Trader or Technical Analyst--elevating both of us in my own estimation--or we're going to be at odds. And, as often as not, that sucks. As a contrarian interviewee in Jack Schwager's MARKET WIZARDS once quipped of other Market Wizards, "Who wants to be on the other side of guys like that?"

Fortunately, I've managed to find an accommodation with a recent article by Alan Farley, whose renown as a technical analyst in general and a sharp-shooting swing trader, in specific, are second to none. Farley, writing for TheStreet.com, referred recently to a trading setup I have written about regularly for the past few years--that setup being Victor Sperandeo's 2B top.

Figure 1: S&P 500. 2B or not 2B on the weekly? This weekly chart of the S&P 500 does a better job than the daily chart of showing the 2B top between the December 2004 and February 2005 highs.
Graphic provided by: Prophet Financial, Inc.
 
The 2B top--or Turtle Soup, as Larry Connors refers to a very similar setup in his book, STREET SMARTS (co-authored with Linda Bradford Raschke)--is one of the many gems in Sperandeo's pair of books, METHODS OF A WALL STREET MASTER and PRINCIPLES OF PROFESSIONAL SPECULATION. Deceptively simple, the 2B top simply states that when a market makes a new high, but reverses instead of following through, there is a sizable chance that a reversal is in the offing. The odds for a reversal can be strengthened when other technical indicators are used--Japanese candlesticks, stochastic divergences, chart patterns, and so forth. But in and of itself, the 2B top (or its opposite, the 2B bottom) can be a powerful pattern auguring often major reversals.

Farley saw a 2B top in the daily chart of the Standard & Poor's 500. I shied away from that call because, to my eye, there was at least one day of followthrough to the upside after the breakout. We can quibble over what constitutes "followthrough" and what does not. I want there to be NO followthrough whatsoever--as in a down day or down bar/candlestick immediately after the breakout day or bar/candlestick. For me, when that happens, there is no unnecessary additional analysis: there was a new high, the market then reversed, start probing short opportunities, end of discussion.

And that is exactly what you get when you consider the weekly chart of the S&P 500 instead of the daily chart. Note in Figure 1 how there is a breakout during the last week of February/first week of March, then a reversal back below the breakout area during the second week of March. That's a 2B top, without any qualification. Sperandeo's take on the 2B top calls for taking a position against the uptrend below the low of the initial high. In this case, that would mean going short below the low of the last week of December 2004, or at about 1204-1205.

The market fell to this level on March 10. Thus, as far as "Trader Vic" is concerned, 2B top traders looking to go short should already have their game on.




David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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