US SPX 500 – backs off symmetrical resistance

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.

Weekly Chart

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.  

US SPX Cash CFD - Weekly. Source: CMC Tracker

US SPX Cash CFD – Weekly. Source: CMC Tracker

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.

Daily Chart

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.

US SPX Cash CFD - Daily

US SPX Cash CFD – Daily

 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.

About Ric Spooner

Over 30 years market experience - professional trader, broker, director
This entry was posted in Market, Shares, Stocks, Trading and tagged , , , , , , , , . Bookmark the permalink.

8 Responses to US SPX 500 – backs off symmetrical resistance

  1. dv34 says:

    Nice trade… there are double butterflies in there as well, been watching the same thing on Dow

  2. Lovely defined risk, and with supportive global sentiment over many overvalued risk currencies putting strain on their exports. There could be some lovely fundamental drive to back this setup. I like! thanks for sharing.

  3. Julius says:

    Hi Ric,
    How were you able to draw the 127% price extension. The default on the platform appears to be 100% then 138%.

    • Ric Spooner says:

      Hi Julius,

      The best way to do the “external retracements” like those in this set up is to use the Fib tool not the Fib price tool. This is the first Fib button on the Drawing task bar and does retracements.
      You can easily edit the values on Tracker’s Fib retracement tool. Just hover the mouse over the Fib retracement and click on the round icon that appears. In this case you are putting in numbers above 100% e.g 127% or 161.8% that will go back past or “external” to the trend starting point
      You can also set default values so the tool initially shows the measures you commonly use
      I’ve recorded 2 videos on using Fib tools and strategies. These were posted to the blog on 12 December If you are interested you can access these via the blog archives
      I hope this helps

  4. andy says:

    Don’t watch the SPX much, but had strong time and price on XAO yesterday so had to short it, same cycles that brought in the November low. This decline should overbalance the previous decline. Going down into 3rd week in March IMHO. Cheers

  5. Barry Webber says:

    sp500 middle peak on top resistance channel and lower support on lower channel difference multiplied by 1.618 =1516 (last resistance ) .618 extension

    • Ric Spooner says:

      Thanks Barry. This would perhaps support the case for having the stop a little higher to accomodate move up to around this level.

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