Market Sidewinder Could Bite Bulls and Bears

I'm sensing a theme here.

After last Friday's sharp reversal, I went back and looked at my trading notes over the last four months. I discovered that my market view has been fairly consistent during this time frame. The examination helped put things in perspective and let me get a handle on where we might be headed next. But let's rewind to last February.

My Feb. 18 column offered bullish predictions from the more esoteric side of the trading community. As it turned out, these market wizards were spot on, especially in reference to the turn dates of the Bradley Model. This adaptation of astrology into a market-timing tool pegged the March bottom to the day. So much for the virtues of skepticism.

The Bradley Model now points to a long-term cyclical high during the first week of July. Where does that leave us after last week's nasty turnaround? Let's move to my April 21 column for the next piece of this interesting puzzle.

At that time, I argued that market volatility cycles had shifted, and that we'd see the VIX drop to summer lows more consistent with its performance in past years. Guess what? That's exactly what has happened in the last two months. Indeed, this VIX "reversion to the mean" flagged the parabolic rally we just completed last week.

Observant readers pointed out that the VIX tends to bottom ahead of the broad market. The index reached its last low in mid-May, and the market continued to rise for three more weeks. What can we expect now? There's still one more thing we need to look at.

Just two weeks ago, I talked about the S&P 500's massive head-and-shoulders pattern with its neckline resistance at the 960 to 970 levels. The index managed to break above this "line in the sand" at the start of last week. This was the trigger point for the spike we saw through the 1000 level. Now that we've rallied through the head-and-shoulders neckline, it should become support on the current pullback.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley had no positions in trading vehicles mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to [e-mail]. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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