Get Ready for Range Expansion Play from SPY Intraday Triangle

Mar 11, 2010: 2:10 PM CST

If you’ve been lulled to sleep by the recent intraday market action, don’t fret.

According to the long-standing price principle of “Range Expansion and Contraction,” the next move in the market is likely to be a range expansion breakout swing move, that will offer opportunities for those aggressive enough to take them.

Let’s take a quick ‘pure price’ look at the S&P 500 ETF SPY and note the symmetrical triangle compression and the boundaries to watch for a potential breakout.

I drew the dominant trendline boundaries in blue, with the lower line coming in at the $114.75 level and the upper line resting at the $115.00 level – giving us a 25 cent compression boundary.

These levels correspond to 1,140 and 1,145 respectively on the S&P 500 Index itself.

Traders often fear taking breakout moves due to the potential for a bull or bear trap (a false break) to occur, and that is indeed a risk for trading these compression set-ups.

True breakouts trigger “positive feedback” where one side is forced to take stop-losses while the other side puts on fresh breakout positions.

A break above 1,150 in the S&P 500 would likely trigger a flood of stop-losses as the index breaks to new recovery highs, but should a downside break occur, we would see bulls running for the exits while bears put on fresh breakdown positions.

The edge often comes from the breakout itself (and relatively small stops) due to the potential large range expansion move that can occur (again, relative to the stop – popularly on the opposite side of the trendline).

I’m also showing the compression in the 3/10 Oscillator and the intraday TICK extreme readings (to show what happens to indicators in a price compression zone).

I wanted to put this chart up quickly to show the potential breakout that could occur if not by the end of this session (one hour left) then potentially overnight or into Friday.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

11 Comments

11 Responses to “Get Ready for Range Expansion Play from SPY Intraday Triangle”

  1. terlyn Says:

    I've been watching that all day, but also watching the TICK. When TICK went to extreme high, shorts pushed price back…so far at least. Does this give us a clue as to whether price will be able to overcome resistance to the upside?

  2. Corey Rosenbloom, CMT Says:

    Looks like we had an initial break while I was writing this post, but haven't broken to new recovery highs (above $115.35 and 1,150… but that could happen while I'm writing this comment!)

    Bullish volume surged just then. It's all about supply/demand. If bulls can push higher and then bears cover shorts, then we will see a potentially large expansion.

    If not, then the potential breakout will fail. Must watch closely as this unfolds.

  3. terlyn Says:

    This was a two-day compression.

  4. terlyn Says:

    Major Price/TICK/Moment divergence intraday.

  5. terlyn Says:

    I've been watching that all day, but also watching the TICK. When TICK went to extreme high, shorts pushed price back…so far at least. Does this give us a clue as to whether price will be able to overcome resistance to the upside?

  6. Corey Rosenbloom, CMT Says:

    Looks like we had an initial break while I was writing this post, but haven't broken to new recovery highs (above $115.35 and 1,150… but that could happen while I'm writing this comment!)

    Bullish volume surged just then. It's all about supply/demand. If bulls can push higher and then bears cover shorts, then we will see a potentially large expansion.

    If not, then the potential breakout will fail. Must watch closely as this unfolds.

  7. terlyn Says:

    This was a two-day compression.

  8. terlyn Says:

    Major Price/TICK/Moment divergence intraday.

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