An interesting chart development in the S&P 500

I have been mentioning in recent pieces my opinion that Wednesday’s bounce off the S&P 1040 S/R level marked an interim cycle low and that risk would be bid in the near term. Using that assumption, an interesting pattern is developing in the chart of SPY/S&P 500.

I have written about the impending head & shoulders development in the charts on multiple occasions already, with January highs marking the left shoulder, April highs the head, and recent highs this month the right shoulder. The neckline around SPY 102 suggests a breakdown to about SPY 84-86, if the traditional head & shoulders target calculation is used.

However, another pattern is developing that is implying a similar target zone, that is a bit less voodoo-ish than head & shoulders. If this week’s lows are taken as cycle lows in the same breadth as July lows marking their cycle’s lows, then the trendline connecting these lows seems to form the support trendline of a very large symmetrical triangle that is quickly approaching its apex.

April & August highs (the head & right shoulder) connect to form the resistance trendline of the triangle, and using the triangle’s range and projected apex/breakdown level, the target implied is around 85-85, which translates to the important S&P 875 S/R level.

Triangles are unique chart patterns because they make intuitive sense. Resistance areas are where excess supply overtakes demand and price falls, whereas support zones indicate excess demand. If both resistance and support trendlines are converging, that indicates that supply is being offered at marginally lower levels (sellers getting more aggressive) while demand is being offered at marginally higher levels (buyers getting more aggressive). This type of positioning often precedes big moves, as one of the theses (bull/bear) is proven wrong and the other side of the trade (the right side between the bulls & bears) “wins” over, with the wrong thesis being liquidated and amplifying the move. Although technical analysis gets a reputation for being little more than voodoo forecasting, some of it, like well-defined triangle patterns in the indices, have a priori basis to their theses and implications. As an example, I’ve provided the symmetrical triangle in QQQQ that “called” the massive move down during and after the fall 2008 market crash.

Before (implied target of QQQQ 27):

QQQQ before

After (actual low of just under QQQQ 25):

QQQQ after

I am expecting a bounce from here to test the upper bound of the triangle, which corresponds well with the overhead 200d that should also provide resistance. If SPY indeed fails to break its triangle resistance/200d, I expect that test to mark a very significant top in the market and expect the next move to be the downside, breaching the triangle’s support level, and then next the 103.50 & 102 S/R zones, taking SPY down to below 90.

In the event of a triangle breakout to the upside, I expect SPY to test June & August interim highs around SPY 113 and price action from there to determine trend; continued strength through 113 should take the market much higher, while selling at 113 and subsequent 55/200d breakdowns should mark the top and precede a big move down.

I am expecting a bounce from here to test the upper bound of the triangle, which corresponds well with the overhead 200d that should also provide resistance. If SPY indeed fails to break its triangle resistance/200d, I expect that test to mark a very significant top in the market and expect the next move to be the downside, breaching the triangle’s support level, and then next the 103.50 & 102 S/R zones, taking SPY down to below 90.

In the event of a triangle breakout to the upside, I expect SPY to test June & August interim highs around SPY 113 and price action from there to determine trend; continued strength through 113 should take the market much higher, while selling at 113 and subsequent 55/200d breakdowns should mark the top and precede a big move down.

SPY

ES 1

ES 2

OPEN TRADES

Short EUR/USD | 1.3120 | stop 1.2915 | +360 pips
Short AUD/USD | 0.9175 | stop 0.9100 | +190 pips
Short GBP/USD | 1.5985 | stop 1.5810 | +465 pips
Short /NG | 4.485 | stop 4.510 | +16.77%
Short /ES | 1113.00 | stop 1100.00 | +4.40%
Short PCX | 10.85 | stop 12.40 | +3.22%
Long /SI | 18.41 | stop 17.75 | +3.97%
Short /ZN | 126’11 | stop 126’24 | +1’36
Long BIDU | 77.50 | stop 75.60 | +2.41%
Long CMG | 145.95 | stop 140.00 | +4.85%
Long IT | 28.56 | stop 27.55 | +1.51%
Long CCU | 56.30 | stop 55.15 | +2.54%
Long PAY | 23.99 | stop 23.35 | +2.21%
Long SLW | 21.84 | stop 21.35 | +4.40%
Long SOL | 8.09 | stop 7.05 | +3.21%
Long N | 18.00 | stop 17.20 | +3.00%
Long HS | 19.45 | stop 17.75 | +5.40%

Advertisements
This entry was posted in Market Commentary. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s