Not content to see that something works without understanding how, I went back to the 2000 and 2007 tops. Made a fascinating discovery. The channels I'd drawn, based on what the charts showed me, actually work out to be the trendlines drawn out 2 standard deviations in a regression channel. Check it out:
TOS draws these things for you, so it's an easy matter to set the lines at -2, -1, 0, 1 and 2 std dev's and let it show you the way. As would be expected, the +/- 2 std dev trendlines (outside, in red) line up with the bollinger bands. The entry point for the channel is when the index hits the mid-line. Its first retracement marks the lower end of the channel, and its subsequent high(s) marks the high end.
Throughout the pattern, the mid-line acts as a pretty good support/resistance line on an intermediate basis. And, of course, the +/- 1 std dev lines capture the bulk of the advances and declines (by definition.)
What's really interesting to me right now, though, is what happens at the end of the pattern. When the index loses its long-term trendline (e.g. falls out of the rising wedge) and all seems lost [watched CNBC today?], the index bounces off the lower end of the channel one last time and makes a return trip to the midpoint of the channel. Happened in both 2000 and 2007.
Also note that the index, when it seems done with the channel bottom, still comes back for one last touch before heading south for the winter. So, if you're sitting around, wondering where the panic is if this is THE END, now you know why. As b'tugly as things look, this ol' gal has one last dance left in her.
Here's where we are as of late Friday afternoon.
If the pattern repeats, it gives us a little more precise idea of there the market should turn. It appears to be at 1328-1330, where the central line of the channel crosses the bottom of the rising wedge. I'll spend the weekend looking at other tops just to double check. So far, more than a few pass the eyeball test, but I'd like to make sure.
Have a great weekend, everyone!