Technical Analysis - History Says Sell Off to Come

For the month, we are putting in an interesting candle pattern. I like to call this the "Denial" bar. To me, the "Denial" bar starts when a potential top or near top is reached. Usually, early in the month the bears come in and take over, thus driving prices down, however towards the middle to the end of the month the bulls capture back momentum and charge prices higher, usually back to close to unchanged, or even make gains month-over-month. This is a bull trap. The bulls believe they have regained control of the market, however it is soon lost and the downwards selling pressure takes hold.

While I could stand corrected in the coming months, the "Denial" bar has reared it's ugly (for the bulls) face before. Using the SPDR S&P 500 ETF ($SPY), here is a few where each candle is one month. The purple boxes indicate a "Denial" bar followed by a reversal to the downside in the months to come (starting in 2000):

SPY 2000 - 2001

SPY 2007

SPY 2012

Now nothing at this time says we won't retest or even possibly make new highs in SPY. As seen in 2000-01, the highs had been put in when the "Denial" bar occurred and the sell-off resumed the next month. In 2007, a different scenario happened where we made new YTD highs after the "Denial" bar was put in and then proceeded to sell down through 2009.

If we break this down on a daily basis (each bar = 1 day), we can see just how these played out during the months in question, starting in 2000:

... and in 2007 ...

 

... and now, in 2012...

 

What is interesting about all three of these patterns is that the move higher was not through rotation or consolidation, but rather a strong bid "off the bottom" putting in reversal candles. These are signs of short coverings and not of accumulation.

The question is, do we make new highs going into year's end and then follow through with some sort of sell-off in 2013? Or was the bull trap set and we begin to sell off into December and through Q1 of 2013? Or is this time different and we are headed back to the all time nominal highs in the S&P 500?

Time will tell... but history shows us we could be getting close(r) to a possible big sell-off.