Index Triangle Pattern Becomes More Uncertain

Aug 13, 2008: 10:26 AM CST

What a difference two days makes!  As of Monday, almost all eyes were focused on a potential breakout from an ascending triangle formation on the major US stock market indexes, and now that pattern is invalidated, and one of two new possibilities exist – one benign and one ominous.  Let’s look.

S&P 500 Daily Chart:

As I wrote briefly in a previous entry, the Indexes were forming a possible ascending triangle break.  That analysis appears now to be invalidated by price failure to follow-through, and now price returns to a confirmed ascending channel structure.

Let’s hope (for the bulls) that the pattern resolves itself into a rising trend channel pattern, which means prices will likely steadily (though choppily) head higher, and could break to the upside, or could continue in the channel for a few weeks.

However, we must now raise the possibility of an ominous specter – that the price is forming a “Bearish Rising Wedge” pattern (examples from StockCharts.com; examples from Thomas Bulkowski’s site), in which the recent rally is a ‘sucker rally’ and price will break sharply to the downside, similar to a bear-flag continuation pattern.  We can’t confirm this yet, but we do need to be aware of its possibility.

The ascending triangle theory (on the chart) gives us a bullish projection on all indexes – should the pattern switch to a downside break and completion of the rising wedge, we would have a sharp and deep downside projection – but let’s talk about that if it happens.  Let’s switch our outlook from short-term bullish to ‘wait and see’ neutral (in terms of waiting for this pattern to complete).

Notice that I’ve drawn two trendlines – the darker line represents intraday prices and the narrow line represents closing prices only.  There’s little difference in these trendlines, and they both bring us to similar conclusions.

Let’s look at something additional with the Dow Jones Index.

Dow Jones Daily Chart:

We’d need to stay above 11,450 to keep the rising lower trendline in tact and valid.  It is clear, however, that price is consolidating as it rise, forming an eventual apex (swings are clearly narrowing).

I want to call your attention to the clear and present negative volume divergence, which is setting up as prices move higher – this is a strong non-confirmation of the recent rally, and tilts the odds a little more in favor of the possible “rising wedge” formation.

Remember, we do our analysis on the basis of what we see at the moment, and all analysis (from fundamental to technical to quantatative) is subject to change when new information – confirming or disconfirming – enters the system.

The outlook is a little more uncertain than it was on Monday – keep your eyes focused on these developments.

(Update:  I just saw that the Art of Trading blog called this potential wedge setup back on August 7th)

2 Comments

2 Responses to “Index Triangle Pattern Becomes More Uncertain”

  1. Richard Says:

    The 8/12/2008 Greg Michalowski USD JPY Chart shows a complete breakdown.

    So now the US Dollar will now be turning lower.

    The Dollar Rally that began July 14, 2008 as the yen carry traders sold oil to take profits is now over.

    Now, the yen carry traders will be selling to take profit in the financial, consumer, and value shares, that propelled the stock market up.

    All stock market indexes, such as the S&P, the NASDAQ, the Dow, and the Russell 2000, will be falling lower.

    As you point out, the divergence is bearish.

    The investment application is to go long DXD on opening tomorrow.

  2. Murph Says:

    The Q’s did breakout out of an ascending triangle on August 6th. How does that influence the general market and your nuetral stance?