Have you seen the triangle pattern that’s been forming over the last few days in the S&P 500 or SPY?

If not, let’s take a few chart glances at the pattern, explain what it means, and what we can expect in the week ahead from the pattern.

First, the pure price glimpse at the ascending triangle:

Ascending triangles form when price ’smacks’ into an overhead resistance level, but as that level holds, price forms a series of higher lows in the context of a rising trendline.

That’s what we’re seeing in the SPY, with the upper resistance level at the $111.50.  Over the last few days, price respected a clear rising trendline that currently ends at the $111.40 level.

So, one of those two trendlines is about to break… or stated differently, price is about to break through one of those trendlines.

According to the Price Alternation Principle, price alternates between periods of range contraction (like triangles) and range expansion (like breakout moves).

Given that we’ve currently formed a clear price compression pattern, odds favor a range expansion breakout move to occur soon.  Or at least that’s what the principle states.

Officially, we can’t predict with 100% certainty which direction price will break, but we can anticipate a potential big breakout move one way or the other.

We can, however, look at other indicators and higher timeframes to assess the odds of an upside or downside break.

Let’s do that now with the 15-min intraday chart:

I’ve added volume and the 3/10 Momentum oscillator to the mix.

During the entirety of the price rise, both volume and the momentum oscillator have been declining.  That’s a classic non-confirmation of the price rise, and it suggests that the rise is likely to result in a downward resolution.

In other words, to expect bullish price continuation, we want to see both volume and (hopefully) momentum RISE as price rises.

If we don’t see this, then it is a bearish caution signal – and that is the message from momentum and volume:  Caution!

Let’s take one more quick look at the 30-min chart before seeing the daily structure and levels to monitor:

On the 30-min chart, we see the exact same negative volume and momentum divergences – that’s bearish.

The rising trendline actually extends back beyond where I drew the line on the 5-min chart.

And in fact, the 30-min chart gives us an example of how the Price Alternation Principle works.

Price ‘consolidated’ in a sideways rectangle from August 24 until the powerful range breakout on September 1st.

Again, from consolidation comes expansion.  Price expanded sharply to the upside before volatility wound back down into our present triangle pattern.

From that principle, we would expect a range breakout move soon to come.

Where might that range breakout take us?  Let’s turn to the daily chart for clues:

Without getting too detailed, we have three price levels to watch on the daily chart.

Right here, price is having trouble overcoming 1,110.  It’s not a super significant level by itself, but above it is the convergence of the 200 day SMA – which has been moderately important lately – and the upper Bollinger Band.

These rest at the following levels respectively:

Upper Bollinger Band:  1,117
200 day SMA:  1,115

What if the breakout is indeed to the upside, slicing above this resistance?

Then we’ll almost certainly hit 1,130.  That’s the “double top” resistance from June and August’s highs.

In the event that the breakout is “the real thing,” then any breakout above 1,130 will be a big deal and stop-out a lot of short sellers (triggering a short-squeeze) as buyers rush into the market.  Such an event could propel the market up to retest the 1,170 prior high for an initial breakout target.

What if the breakout is to the downside?

Given that the 20 and 50 day EMAs have not really been all that important in terms of turning points in the market lately, we would possibly expect an eventual target of a retest of 1,040.

Keep in mind, we’re not just in a short-term triangle, but a 3-month rectangle pattern.

And eventually, price must break out of that rectangle too!

This is the type of structure I use each day with members of the Idealized Trades Report – building analysis from the lower timeframes up to the higher frame and setting up our “IF/THEN” statements for the next trading day.  Intraday reports also focus on ‘teaching’ concepts, patterns, opportunities using examples from that trading day – history repeats.

For those who aren’t intraday traders, I work the other way in the Weekly Report, which focuses on Inter-market Analysis (Bonds, Stocks, Gold, Oil, Dollar).  I start with the monthly chart and then travel down to the weekly and then daily chart, highlighting patterns, opportunities, and things to watch.

Stay alert – if we do start to see a breakout occur early next week from these levels, be prepared!

Corey Rosenbloom, CMT
Afraid to Trade.com

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