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Expect 'Retest and Regenerate' to Come Prior to a Break of Anchored Resistance

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Look for a light volume retrace as compared to the anchor bars that comprise the anchor zone and then some sort of candlestick reversal pattern to signal a turn back north.

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MINYANVILLE ORIGINAL Stocks typically do not move in unidirectional blasts for very long. They ebb and they flow. Those terms were introduced way back before the turn of the 20th century when empirical observations validated the assumption. But like anything in the market, it's not 100%.

Over the past two weeks, I have utilized the PowerShares QQQ (QQQ) and the SPY to call the more significant twists and turns in the market on a short term time frame. Two weeks ago, I wrote about the impending pull back that was expected to measure between 1.5 to 3%. The market quickly acquiesced with 4%. After that, I flipped around prior to the big Friday blast off last week and suggested it was time to get back on the other side.

Now that we have lift off and extension, one would expect that for the next few weeks this setup bodes well. However, in the coming weeks, it is highly probable that we will witness the ebb and the flow. This week, the S&P 500's (^GSPC) qualified trend turned suspect bullish -- and if you look at the qualified trends of all the major indexes, they are not in bad shape although all show suspect bullish moves in the short term.


Source: www.tatoday.com

A qualified trend of suspect bullish is not a bad thing -- after all, it is bullish -- it is just an indication that the trend is bullish yet weaker than desired. That is what qualification is all about: Measuring the qualitative difference between trends. More importantly, it says that something on the order of about 70% of all trends of this type end up doing a retest and regenerate sequence within six bars. [Editor's Note: The author details regenerate sequences in his book Trend Qualification & Trading.] What that means is that we can be fairly certain that this market will retrace some of these gains in short order. The question is how much.

Here's a chart of the SPY, which had pushed over the swing point high on lighter volume. I have annotated the chart with anchored support and resistance zone as well as the retest and regenerate zone.


Source: www.investools.com

A retest and regenerate zone is just what it sounds like: A place on the chart where the market comes back to retest and to decide whether the breakout move is sustainable or not. Given the setup I see in these charts currently, I expect it will be sustainable, thus it should regenerate and move higher still. In fact, the target is $141 on the SPY if this happens.

In terms of time frame, I would expect the retest and regenerate to come prior to a break of anchored resistance; the overlap between the retest and regenerate zone and the anchored support zone is the place that one should concentrate their purchases on the retrace. What you are looking for is a light volume retrace as compared to the anchor bars that comprise the anchor zone and then some sort of candlestick reversal pattern to signal a turn back north.

Twitter: @tatoday
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