The S&P 500s Diamond in the Rough

By: Robert McHugh | Sun, Jun 5, 2005
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The S&P 500 formed a perfect parallelogram Diamond Top pattern using closing prices and trading days. Take a good look at the pattern that unfolded in the S&P 500 below. The S&P 500 not only formed a perfect parallelogram Diamond Top, but it also topped on the Bradley turn date of June 2nd, 2005. Diamond patterns are incredibly rare and do not have to - and usually do not - also take the form of a perfect parallelogram. They can be off in the number of trading days on each side of the pattern. But this baby is right on perfection. And, if we take the ratio 13/17, we come very close to a Fibonacci .786.

Here's what Edwards and Magee, in their phenomenal tome Technical Analysis of Stock Trends (St. Lucie Press, copyright 2001, W.H.C Bassetti Editor), have to say about Diamond patterns: "Usually a reversal pattern . . . Often found at Major Tops . . . The right side of the pattern . . . should clearly show two converging lines with diminishing volume." We have all this.

That takes care of time. Now price. You ready for this? Using closing prices, to within 7/10ths of a point, the following holds true: The price rise from April 20th to June 2nd equals 1.618 times the price rise from April 20th to May 9th. The price rise from May 13th to June 2nd equals two times the price decline from May 9th to May 13th. The price decline from May 9th to May 13th equals .382 times the rally from April 20th to June 2nd. The rally from April 20th to May 9th, equals .618 times the rally from April 20th to June 2nd. The rally from April 20th to May 9th, plus the rally from May 13th to June 2nd equals 1.382 times the price advance from April 20th to June 2nd. And finally, the decline from May 9th to May 13th, plus the rally distance from April 20th to May 9th equals the price rise from April 20th to June 2nd. With this kind of market order in place, it sure smells like a top, doesn't it?

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Robert McHugh

Author: Robert McHugh

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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