Stock Market Pattern Update

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The move down off the May 22nd high unfolded with 3 relatively distinct moves down, each larger than the previous one.  This creates a possible expanding triangle pattern formation.  There are a couple typical future modes of price action of an expanding triangle.

1) If the pattern is a completed correction, often price will completely retrace the E portion of the expanding triangle, but often much more slowly than it took to form.  Given the current price action this is a possibility, but the E portion has not been retraced completely yet.  If it is, I think that it more likely logically indicates that the correction is complete and prices will make new bull market highs soon.

2) An expanding type of pattern may often be the first phase of a complex corrective pattern.  So we see something like: (expanding triangle) -x wave- (contracting triangle).  In this case the rally in the x wave position, often won't completely retrace the E wave before leading to a move to new lows.

If this second scenario is to unfold, then I think it is more likely that the current rally stalls very soon without taking out the June 18th highs.

Looking at the momentum indicator on the hourly time frame of this chart, we see a bearish divergence set-up making the technical possibility of a rally ending here a realistic one.  Also the large gap down from June 20th has filled, which is a point to watch.

Based on the time consumption of the prior two waves D+E, projecting that time forward from the wave E low, gives us a date of July 12th.  That would be the next important turning date in my mind based on the common time relations within these patterns.

At ~5% the current rally off the June low is larger than almost any corrective rallies in the bull market since 2009 other than in the large corrections of 2010 and 2011.  So if we do see a move to new lows it may imply that we are in a large scale correction similar to those.  However, the flip side is that this large of a move probably implies that the correction is already complete.


What's the trading takeaway message?  It is sensible to take long positions, but a stop below the June low would be mandatory because of the possibility of a much larger correction occurring.  The current correction was only about 7%, whereas the 2010 and 2011 corrections were ~17% and 22% respectively.

It is also sensible to take short positions based on hourly time frame signals if they occur below the June 18th highs.  In this case the stop should go above the June 18th high because a move above there would be further logical implication that the correction is already complete and any move down will be short-lived.