Index Ascending Triangle Coming to Apex
There is a clear ascending triangle consolidation pattern developing on the major US Equity Indexes, and it appears we are reaching the Apex, or break-out point sooner rather than later. Let’s take a look at the S&P 500 Index and see this development.
S&P 500 60min Chart:
The S&P 500 is showing significant resistance about the 920 level which has been confirmed three times, and is showing resilient support via the rising trendline from November 24th to present, which has been confirmed four times (though the early December decline did not fall all the way to the trendline).
What this tells us is that a break in either direction – above 920 or below 880 – could lead to a significant ‘trend’ (continued) expansion move. Remember the basic price principle: “Price alternates between range expansion and contraction.” Using this principle, we can observe the current consolidation – in the form of an ascending triangle – and then expect some sort of expansion move once the market moves out of this consolidation – or balance – area.
The momentum oscillator is also reflecting market consolidation, as it is recording contraction in price swings which is coming to a point about the +10 and -10 indicator levels.
Let’s actually take a closer look at the 30-minute chart for a ‘zoom-in’ on the recent consolidation area.
S&P 500 30min Chart
Notice how the 200 period SMA has contained price on each subsequent test. The other moving averages, however, have not been as helpful in terms of setting up trades or position management.
From this view, it would seem like there could be a bit more time for price to spend in this range, but not much. Generally, we would expect price to break-out of the trendlines somewhere between 2/3 and 3/4 of the way to the apex, or the exact price at which the lower rising trendline would intersect the flat, upper trendline. We’re likely just about there by this measure.
A quick note – traditionally, ascending triangles have bullish expectations and that could indeed be the case here. I do not ascribe bullishness or bearishness to triangles, but rather note them as consolidation patterns with the expectation that price will likely burst with an impulse move in one direction or the other, and I often advocate avoiding trying to predict in which direction price will break.
Case in point, not long ago, we had a bearish descending triangle in the indexes… which broke sharply to the upside (throughout October before eventually falling to new lows).
Stay on top of this development and try not to be caught off guard by a sudden price expansion move that could happen soon.
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Corey Rosenbloom
Afraid to Trade.com
Corey, excellent posting! Good market view based on 30 minute chart. Ascending triangles are more likely to break to the upside.
However, Cory we can also see a bear flag on the daily charts and it looks like that it has already been broken for ES, SPY and DIA. QQQQ and IWM are still within the ascending channel of the BEAR flag.
I thought that I will point out something to lead into more confusion. That’s the fun of this market!
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Hi, I know almost nothing about technical analysis. But don’t triangles have a side which is stronger than the other? Horizontal side is weaker, correct? If such, this will imply the break will be to the upside.
Dacian,
Indeed, classical technical analysis teaches that, but for whatever reason, the old way of thinking about patterns doesn’t work in today’s environment.
Case in point, we are taught that triangles are almost always continuation patterns that resolve in the direction of the prevailing trend. This may be the rule, but there are many exceptions to it.
Also, while ascending triangles have bullish expansion biases and descending triangles have bearish expansion biases, this is not always the case, as was the example in October when a nasty looking bearish descending triangle formed on the US Equity Indexes… but resolved to the upside.
It’s possible that this ascending triangle will resolve to the downside.
I think the best strategy is to see triangles as “pauses” or consolidation patterns, expect that they will resolve in the direction of the prevailing trend, but still wait for the break to occur before taking a position – in other words, do not anticipate breakouts. That’s my personal opinion though.
Thanks. The prevailing trend is down, but it’s still a question of timeframe, right? Depending on which 4-up wave we are :), the triangle you’re showing might resolve to the upside for now, but you still can draw another horizontal from the election period for a bigger triangle which will show 3.4 triangle solved to the downside.
Anyway, here is a case for this traingle to solve to the downside soon.
http://2.bp.blogspot.com/_V7Pddp58Py0/SUx764qYXdI/AAAAAAAAB9o/jdfaSjEVEQE/s1600-h/xom.png
XOM is the 2nd weighted stock in the Dow.
Dacian,
Sort of – one can have a confirmed up-trend on say a 5 or 15 minute chart, a neutral trend on a 30 minute chart, and a downtrend in the daily and weekly. Short-term structure precedes long term structure.
I’m not saying the current triangle has to resolve down… or up. But that it will resolve. It’s sort of the ‘weaker’ way out but it’s one that over time to me at least generates more profits and ‘edge’ than trying to guess which way it breaks. Once you get a break, more times than not, the break will continue.
Also, I would caution against making volume analysis on Options Expiration days – those tend to have abnormally high volume simply because funds are having to adjust positions up and down which contributes to ‘random’ volatility and volume.
But you’re right – a trendline break on high volume is a bearish signal. We’ll need to wait for Monday to confirm it though because of the Options Expiry Friday.
Good charting!
Triangle still valid and playing after today’s session, correct?
Hmmm…
http://api.ning.com/files/GkXchk9kCndAA-nSwuPcie72Mcl5sNBVNZaXLtzvYlYe67lUXm1eFfjf*uM1spYfZzoxhvQODdUgl2Phw9G6x9CwG1IILF5o/spx.png