S&P 500: Bearish Butterfly. Cyclical Top?

SP:SPX   S&P 500 Index
488 5 0
The S&P 500             is closing in fast on its Bearish Harmonic Butterfly PRZ near 1750, less than 3% above (note: chart is arithmetic monthly, ratios close/close).

Basic rungs of support come in at X (1565, October 2007's high), followed by Summer 2011's high at B (1360-1370) and the Sep 2011 closing low near C (1130). In this context, the next major resistance zone comes high overhead at XA's 1.618% Butterfly extension D near 2050.

This pattern features a compact PRZ of ~10 points that is beneficial for devising solid R-multiple trade setups, even while making the zone more susceptible to whipsaw/failure.
I saw this as well. There is one problem though there is a lower low prior to the B-C leg. Therefore the pattern is invalid. Happy trading.
andrewunknown climbing_stars
Thanks for the comment; but I functionally disagree.

I'm familiar with the criterion you're citing whereby the Q2 2010 correction removes the Q3 2011 correction from consideration and agree on strict theoretical grounds; but in practice, BC is the indisputably dominant swing between A and D, and therefore merits preference. If the pattern as drawn did not meet all Butterfly measurement criteria I would say that choice is too arbitrary; but it does exactly. In my experience, a rigorous but realistic technical pragmatism like this is of far more value than marginally useful hyper-precisionist promulgations discarding any pattern that doesn't satisfy draconian criteria set according to some Platonic archetype of pristine harmonic logical puzzles.
climbing_stars andrewunknown
I disagree with you as well, but that's what makes a market buyers and sellers. I am just stating facts that. I have traded harmonic patterns for quite some time. The patterns that follow the actual harmonic guidelines are the ones that work out. I cannot tell you how many times I have traded alterations of the legs only to watch them fail. Larry Pesavento ran countless tests on harmonic patterns, as did Leslie Jouflas, and Scott Carney. All of which concluded that the B-C leg must be a higher low than the A-B leg with no prior lower low. This is all I was merely stating. I am not saying that every pattern has to have absolute fib extensions. I do however believe the legs must follow these guidelines to be a valid pattern. Trade your plan though. To each their own; and good luck. The chart below is the only pattern I see on the daily. Happy trading.
andrewunknown climbing_stars
I've traded harmonics for years, and am familiar with all the literature. So at least we're both generally well-informed about what we're discussing. : )

The issue that arises here is this. It is one thing to state "the B-C leg must be a higher low than the A-B leg with no prior lower low" as axiomatic. Like I mentioned, in theory I agree without giving it a second thought. But "prior lows" occur on a continuum. In fact, lower lows are happening all the time in an up-leg, at some level - it's the amplitude they install in an uptrend; and then the significance we attribute to their amplitude that have bearing on whether we decide a potential bearish 5-point pattern is rendered invalid.

Now one could take this to an absurd level and appeal to a 5 minute chart; but lower lows on the daily or weekly when drawing on a monthly definitely merit consideration; and they will be present on leg AB of almost any monthly bearish harmonic pattern. So, where do you draw the line of validity? (see chart; which low scuttles the emergent harmonic pattern?) There's no objective "valid" here - only what has tested best under a specific battery of criteria But this makes the "countless tests" done more than a little facile despite their supposed empirical heft, and encourages an unhealthy over-reliance in traders newer to harmonics, especially. Over-reliance is a far better place to start from than under, certainly.

The guidelines are hugely important; but in my experience - contrary to yours, it seems - they can be too onerous, especially when they've been elaborated under the aegis of someone such as Carney, who it seems is intent on eliminating as much discretion as possible. Countless hours of study and observation create their own competency and intuition that isn't always in strict harmony with the rules. Ultimately, as you say: to each their own. It comes down to whatever works.

climbing_stars andrewunknown
First off the chart above where the B-C leg is lower than the A-B leg is a different pattern. I haven't measured them but from the looks it could be a shark or a cypher. If what you are trying to insinuate is that declines can happen when the B-C leg is longer. I do agree that beginner traders are to mechanical. After they read something they immediately look for the exact replica in the market to trade. When the market will not always (if at all) give you a pattern on a pedestal. I understand what you are saying. All I am saying is that for the Butterfly pattern the B-C rule applies. There are many other patterns (like those listed above) where B-C is longer than A-B. I also agree you must do your own due diligence and not regurgitate information provided. It would be imprudent to not follow strict guidelines as to lengths of legs. My problem is if you do not have strict guidelines then you start to see patterns you wish to see in the market. You start to force trades that aren't there which is also a large problem for beginners. But if you say that you profited by not adhering to these guidelines, then by all means continue. I am not one to say cease making money. I will agree with you on Carney. It's funny you mention him being strict on patterns. Him and I were recently emailing each other in relation to buying puts on GOOG at 928.00, because I saw an AB=CD on the daily. His response in all caps DO NOT SHORT GOOG. Needless to say I bought puts and am pleased with the result. So like you and I have alluded to briefly. Trade your plan and what you think will be profitable. Don't let others tell you different. I am actually about to post an intermediate time frame look at the S&P. Otherwise I would post it here. Good luck and take care.
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