Many technical analysts have been watching what looks as though it could be a significant resistance line in the S&P 500.
Last night the SPX rejected this line on cue. Further declines below past peaks could make this a development worth watching.
Interestingly, the Australia 200 index hit and rejected channel resistance on the same trading day.
I have shown this formation on a weekly chart to get the big picture view.
Depending on your view of the overall history of this chart you might call the formation between the blue lines a rising wedge; a 3 drives pattern; an ending diagonal or all three.
The basic chart pattern consists of 2 rising trend lines. One across resistance peaks and the other across support troughs. The support line rises faster that the resistance.
The potential for this to be a 3 drives pattern comes from the so far perfect Fibonacci symmetry displayed:
- The move from b to c was 127% of the a to b correction
- The decline from c to d was 61.8% of the b to c rally
- If it stops here, the d to e rally will (just like b/c) be 127% of the decline that preceded it (c to d).
The 3 drives pattern gets its name from the 3 overlapping and choppy pushes higher that can often precede a market eventually running out of steam and beginning a significant move lower. In this case I have labelled the 3 drives a, c and e.
One approach to this type of pattern is to use it for strategies to enter positions with relatively close stops to limit the damage when they don’t work but to stay in positions looking for substantial gains when the resistance does hold
Looking at the daily chart, one such approach would be to sell around current levels now that price has made a minor trend peak at the trend line, placing a stop loss just behind Monday’s high. A move above that level would now suggest that price may not be making a major turning point here and so represent strategy failure.
Overlap back through previous peaks can often be a useful sign of weakness in markets. If a downtrend was to get underway from here, a move below both peaks in the pattern (dashed support line) may be an indication to big picture traders and investors of the potential for a significant decline.
If a trend does develop from here, I’ll post a follow up with thoughts on stop loss management and profit objectives.