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Dow Rebound Likely, Could Reach 12,400: Charts
CNBC.com | September 06, 2011 | 07:26 PM EDT

What will the U.S. market recovery look like? We don't know exactly, but the history of chart behavior suggests several patterns we should look for, and it involves an alphabet soup of L, V and W shape rebound patterns.

Several factors help shape the pattern. First, is what I suspect will be some form of a further quantitative easing (QE3), be it direct financial stimulus or a further debasement of the U.S. dollar which will help export industries.

Counter this against continued high U.S. unemployment rate of around 9 percent, unmanageable budget deficits and credit downgrades.

When the head-and-shoulder uptrend reversal pattern ends there is no set outcome. The downtrend may continue, or a consolidation pattern may develop. It's the nature of the consolidation pattern that points the way to the future trend development.

The Dow, for one, is in the early stages of consolidation.

There are five potential consolidation rebound patterns and most of them are bullish. This includes the V- and W-shaped rebounds from support and also the inverted head-and-shoulder pattern. These are low probability because of their directional bias.

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