Expanding Triangle or Diagonal Top Appearing on SPY - Probable Move Down to 232-235 in Coming Few Weeks

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Currently stocks have been moving higher but with notable weekly time frame bearish divergence in MACD on the SPY etf as well as bearish divergence in the breadth.  So fewer stocks are hitting new highs or advancing relative to previous price peaks.

This is classic type technical signals of a topping of a leg up in prices.

I had noted some recent scans which suggested a likely higher downside risk to upside potential.  However, we have seen mostly upside since then.  Though with the low volatility it has not been a big advance in percentage terms.

The 60 min chart of SPY is now again at a point of notable bearish divergence, and so if a multi week top is to form, it could do so here over the next day or so.

On the chart above I have put a pattern labeling scheme.  I put this here because the pattern in play appears to fit the back tests of price and sentiment studies suggesting downside risk over the coming weeks or couple months.  And clear price patterns can give some refined targets or expectations that may help a trader manage the trade more effectively than a purely mechanical or statistical method.

If this move is a "terminal" move then the implication is for a rapid move back to the starting point of the pattern around 232 on SPY.

If this move is a "B" move then it may be a less explosive downwards move back to the 232-235 area as support, but not necessarily back to the 232 level.

From my perspective of observing market price action relevant to price patterns and key support areas, if prices do correct and move below the 232 level, I think that would likely be a temporary climax point where stops would be run under support, and then prices would begin a rebound of some extent.

Pete

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.