The One Chart That's Worth More than 1000 Analyst Opinions

Reliable indicators are tough to come by, so when you find one, you should hold on to it for dear life. Did you know that the S&P is repeating the exact same pattern set from 2007/08? If you didn’t, take a moment to look at one of the best parallels in charting history.

There is one chart that's been worth more than a thousand analyst options. Seeing is believing, so take a look at the chart below. The Dashed red circles highlight all the major similarities between the 2007/08 and the 2011 S&P highs and subsequent sell offs. The Differences The main differences between the two patterns are: 1) Timeframe. The 2007/08 topping process took longer and 2) In 2008 the S&P touched the trend line three times before crashing through it, in 2011 the S&P touched it only twice. The Similarities The similarities outweigh the difference by quite a margin. Both patterns show a head and shoulders top with a clear neckline. In both cases, the selling accelerated once the neckline was broken (see red arrow). Following the initial low after the neckline break, stocks consolidated before falling to another low. Both times, stocks bounced from their low to retest the trend line. I know many will argue that hindsight is 20/20 (the standard response of anyone who missed out on this opportunity). But even without hindsight, here’s how many have raked in profits by following a few simple pointers. More importantly, we’ll find out if this predictable parallel will continue to play out. >> click here to view chart No Hindsight Needed It took the March post-Japan earthquake low to provide the second touch point for this trend line, so we didn’t get to profit from the trend line in March. But even without the benefit of the trend line, the March 18 ETF Profit Strategy Newsletter stated that: “We expect new recovery highs later in 2011. The 1,369 – 1,382 range is a strong candidate for a reversal of potentially historic proportions.” This high occurred on May 2, 2011 at S&P 1,371 and was followed by the second test of the trend line with a low on June 16. The June 15 ETF Profit Strategy update referenced the trend line and stated that: “Technicals and sentiment data suggests that a bottom has either been found or is close. A drop into the 1,259 – 1,245 range would prompt us to close out short positions and leg into long positions” (long positions were closed and replaced with short positions at 1,325). The S&P’s next rendezvous with the trend line happened on August 2. The July 28 ETF Profit Strategy update warned that: “A break below the 200-day SMA and the trend line may trigger panic selling.” The S&P fell 20 the next five trading days. Based on various technical studies and the 2008 script (see August 14 and 21 updates for details), it was clear that the August 8 low at 1,102 would have to give way to a new low before a rally to retest the trend line. The October 2 update pointed out that: “The ideal market bottom would see the S&P dip below 1,088 intraday followed by a strong recovery and a close above 1,088.” The target for this rally of course, was a retest of the trend line at 1,270. That retest happened last week and the S&P has peeled away since. What’s Next? The November 8 ETF Profit Strategy update warned that: 'The S&P has retraced the maximum allowed and reached a make it or break it point.' Yesterday the market 'broke.' The S&P (SNP: ^GSPC - News), Dow (DJI: ^DJI - News) and Nasdaq (Nasdaq: ^IXIC - News) were all down 3+% while the VIX (Chicago Options: ^VIX) soared. Does this mean that the next leg of the bear market (like in 2008) has started? It may have, but the script's forecast is currently at odds with other forecasting signals, so there's reason to be cautious.