Inside the Descending Triangle in the SPY SP500
The dominant short-term pattern on the S&P 500 (and SPY ETF) appears to be a consolidating descending triangle. Let’s take a look at the pattern on the 60 min and daily charts.
SPY (S&P 500 ETF) 60-min chart:
Classic Technical Analysis texts teach that descending triangles should be expected to resolve to the downside, but that’s not always the case. All triangles are consolidation patterns that represent a ‘pause’ (or correction) in a trend and it can be very difficult to predict accurately in which direction price will eventually expand.
A clear down-sloping trendline connects the four swing highs in May while a clear horizontal line about the $88.50 level connects key lows on a visual support area.
In the SPY, the key levels to watch for a breakout are $91.50 on the upside and $88.50 on the downside… though it looks like this triangle consolidation could last a few more days or even weeks until we get closer to the apex (point where the trendlines touch). Price can be expected to break anywhere from 66% to 75% or more of the way to the actual apex.
Let’s set this pattern up in the larger context of the S&P 500 daily chart:
There’s actually support coming in from the rising 20 day EMA which might even be more important than the horizontal trendline at 880.
With a market in consolidation mode, it’s often best to wait it out to see which side (bulls/bears) becomes victorious in the supply/demand battle. Remember, it’s supply/demand that rules markets, not arbitrary chart patterns and there’s no crystal ball to the future – only odds and probabilities in conjunction with clearly defined expected support and resistance.
Also, if you look very closely, you’ll see that we’re ‘trapped’ between support off the February highs and also resistance off the January highs – that’s adding more complexity to the mix.
The lines are clearly drawn and the risk/reward established. It’s only a matter of waiting to see (and trade) the eventual breakout move that is likely to come.
Corey Rosenbloom, CMT
Afraid to Trade.com
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http://tradingstocksontechnicals.blogspot.com/
I thought it was just a wave B or 2 (depending on your perspective) following the big move off the lows. Correct me if I'm wrong, but either scenario could break to the downside like Corey mentions? But then another strong up-move in July/August/September…
Ya the problem with this is that the first break (up or down) might be a trap (false move)…
Corey,
I really enjoy your insights into many different aspects of trading. Am curious if you have done an EW analysis on the USD? WOuld be interstting to see how it corelates to the SPX over the long term. It appears that we may be in some sort of w3 (just my newbie perspective). Thanks for your generosity.
For the S&P, Prechter and co. think early Mar to early May was either A or W of a three-wave correction up, and what we're in now is either B or X. This seems pretty plausible. They expect us to correct down / sideways for somewhat longer, then eventually have a C/Y up to S&P 1000-1100, which I guess is a 50% retracement of the entire decline.
Of course, they also think we're in primary wave 2, and they think we're going to see a market-killing wave 3 down after that. I don't know if I believe that. It would be easier for me to believe this is primary wave 4.
Anyway, this week it looks like we're consolidating even tighter between, say, 89.6 and 91.6. We've had TD-sequential setups in both directions on the 30-minute, which haven't been able to break out. THe tighter we get, the more I figure a big break is coming. I figure down, going with Prechter & co that this is a corrective wave down that hasn't completed, but if this goes on long enough we could finish the correction sideways and break out hard up…
Hey Corey,
Great analysis you have done so far on the US indices especially on the EW front. I have been trying to do a EW on the Asian indices e.g. Hang Seng Index. It has definitely performed much differently than the S&P and the wave counts on both indices do not gel as they used to before this crisis as the HSI was able to stay above the Oct 08 lows while the S&P and Dow went on to create more multi year lows before the current rally. Do you think you could look at the Hang Seng since you have done something on the Nifty from time to time? Thanks!
hi my friend,
“In the SPY, the key levels to watch for a breakout are $91.50 on the upside and $88.50 on the downside…”
what else to say about today's action that I'm disgusted? I'm not a conspirator-theory-believer, but something is really wrong here. I'm thinking leaving it to those “smart” guys to play it as they wish…
I was shocked at the last minute (literally) hijinks of that's what it was. Smooth, steady day and then all the sudden, “pow!” right at the end.
But it is a weekend and we do get really odd moves right before the weekend begins so maybe fund activity.
I always mean to but somehow get sidetracked on something else.
I've made a note and will try to get that analysis up this weekend – thank you for your request.
I've stopped trying to subdivide this wave, but am rising to the larger picture that it's most likely a part of Primary W4 correction up that should come into resistance around 1,000/1,100 and then we head down to test the lows and let's see what happens there. It's even possible – though less likely – that we're in Primary W1 of a new bull market. The least likely scenario – in my humble opinion – is that we are in Primary W2.
I'm of the “next likely swing” philosophy and then reassess once that swing completes. Odds favor a down-move and then after that, we'll have more information to project. No point in trying to predict 5 swings into the future from here.
The main idea is that we're either completing ABC corrective up in the dollar (long term) or that we are seeing 123. If I had to make a bet, I'd say we just witnessed a counter-move ABC up and the longer-term downtrend (see monthly charts) should kick back in but let's take it week by week.
Could be, but I like consolidations because the risk is defined.
And if you get stopped out, consider trading in the opposite direction because a larger than expected move may result from subsequent people being trapped on the wrong side.
One day, one swing at a time.
As Mark Douglas is famous for saying “Anything can happen in the market!”
The day bounced off some fibonacci fan lines from a few dates. Once it got started I bet short covering was half of it, because everyone was shocked. I was adding long and sold in the last few minutes. I was betting the fund managers would close out the month with a bang. They don't have to buy it all they just half to buy enough at the bottom and then nail the resistance lines to force the computers to run it and force the shorts to cover.
Corey, would you evaluate the action as the last 10 minutes before closing as a fakeout before a massive plunge down or a real breakout of the above triangle?
With so much govt induced manipulation going on in the market, and because retail and institutional traders are staying out, I wonder who will join the Program Trading computers trying to front-run each other?
I always look at Tom Bulkowski's website to see statistical analyses of pattern behavior. Here's his web page for descending triangles in bull markets: http://thepatternsite.com/dt.html I hope it helps!
I've been asking various other traders and the consensus is that it was 'tape printing' or a fake move that – if is real – needs to be confirmed by a higher close on Monday.
It's up to Monday's action to set the stage but for now, the final move up at the end of the day looks suspicious.
Thanks Slammer! He does have a great site.
I've been asking various other traders and the consensus is that it was 'tape printing' or a fake move that – if is real – needs to be confirmed by a higher close on Monday.
It's up to Monday's action to set the stage but for now, the final move up at the end of the day looks suspicious.
Thanks Slammer! He does have a great site.