I’m sure this isn’t news to anyone, but the markets are stuck in a really tight range at the moment. From the lows in January, the weekly ranges of the SPY are as follows: 10.76 pts, 7.55 pts, 7.57 pts, 5.06 pts, and 3.84 pts. Now, at this point anyone can justly argue for either a rally or a sell-off on a break of this range. I personally see the bulls taking control and pulling out a rally in the next few days, so I decided to go back and look at some charts to see what has happened in the past with this type of tightening range. What I found was very interesting. August 07 chart on the left, comparison in the middle, and February 08 on the right.

Looking at a daily chart of SPY I found striking similarities between the pennant that formed after the bottom in Aug 07 and the current one. I then zoomed out to the weekly chart of SPY and what I saw really surprised me. Forming the top of both pennants was one small inside day followed by a huge down day in the market and then an extreme low that was faded. In August we had two days of consolidation before the piercing day and in February the piercing day came immediately following the first wave of selling. The patterns are not exactly alike, but close enough to be interesting. Of course, I’m not betting the farm on the market breaking higher here, but I think it is highly likely. Here is what the weekly pattern looks like.

Over the weekend we took a look at the Dow Jones Industrials going back to the previous market bubble in 2000. We looked at the percent moves up and down and how the market traded at the top and near the lows. From January 2000 to March 2003 the Industrials retraced 38% from 11,750 down to 7,416. We put in a bottom there and the first wave of the bull market ran 45% to 10,753 in February 2004. After this rally, the market was only down 1% off the January 2000 highs.

For the next two years the INDU traded in a sideways range of less than 1,400 points. In June and July of 2006, we had a double bottom in the market and this began the second phase of the bull market. From this point the Industrials rallied from 10,753 up to 14,198 adding another 33% to early gains up to February 2004. All total, from the lows in March 2003 to the top in October 2007 we saw a 92% increase or 6,784 points.

After the 10% correction came in Late November 2007 we got long the market with several ETFs and individual securities. We were lucky make back most of our losses for the year in a matter of a couple weeks. We also were somewhat short through December, and this along with daytrading helped us immensely. From the highs we have now retraced almost 20% and we are again looking to cautiously step back into the market with some selective longs. Although we don’t feel this is the absolute bottom, we do think that there could be a nice rally for a few weeks before the sell off continues. We’ll see.

Last week I was looking through charts of the major Indexes trying to draw some conclusion as to where the market was headed. I am pretty much bullish by nature so I do have a bias to the upside, but I think this chart is quite compelling. I have the longer-term blue trend line passing through most of the market bottoms along with support and resistance levels from June. Also notice the bold yellow line labeled “FED GAP”. The leftmost level shows the big move up in the INDU following the FOMC cutting rates by 50 basis points back in September. We made new highs and the rally lost steam only to come back and fill the gap perfectly which also touched my trend line and crossed just below the 20 and 50 SMAs. Looking for the DOW to make new highs by the end of the year especially if the FED cuts again this week.