Updating the Lazy Triangle Pattern in the SPY SP500

Mar 9, 2011: 4:17 PM CST

I wrote yesterday about the “Consolidation in the S&P 500” which continued today as we wound down to an even LOWER volatility range which made the dominant boundaries even clearer as traders now await a breakout.

Let’s see the update on the market and get ready for the next phase:

A couple of quick observations:

The SPY trendline support boundaries rest at $131.75 and $131 (depending on how you draw the lower trendline) and the upper resistance trendline is stable at $132.75.

Volume is also declining as more intraday traders pick-up on this pattern – and sit on the sidelines until a resolution comes in the form of a bull or bear breakout.

Speaking of volume, it seems that the signal volume is sending is slightly bearish – in that price declines are met with higher/increasing volume while price rallies are met with lower/declining volume.

It doesn’t necessarily mean that price is going to break to the downside but it’s something to watch.

What we’re seeing is a reminder of the Price Alternation Principle – wherein price alternates between periods of Range Expansion (what we saw previously in the up-trend move and are likely to see soon into the future with a breakout) and Range Contraction (like we’re seeing now in the Symmetrical Triangle Consolidation Pattern).

Anyway – there’s not a lot of profound insights anyone can add to the current structure:

Either we get a breakout to the upside which targets $134.50 and then new highs… or we get a break to the downside which threatens a short-term trend reversal under the $130 and $128 targets.

As with all consolidation patterns, it’s often best to let the market tip its hand and then play the likely range expansion move – being aware that traps are notorious for forming (as in, use stops if the price breaks out initially then quickly returns inside the range boundaries).

Range conditions typically lull traders to sleep or complacency and so they miss trading the breakout when it occurs – pay close attention as this range winds down to perfect equilibrium… and then likely breaks free into a new impulse move one way or the other.

Corey Rosenbloom, CMT
Afraid to Trade.com

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