The S&P 500 has been consolidating and trying to find a bottom since the low set two weeks ago. However, it has been coiling up, forming lower highs and higher lows, with volume decreasing. This action is meeting the classic definition of a symmetrical triangle, which is usually (but not always), a continuation pattern.
Martin Pring cautioned that triangle patterns that take more than 4 weeks to develop may not follow through, while other technical analysts say it can take up to 3 months for a breakout. Generally, technicians expect a breakout from half to two-thirds of the way towards the apex of the triangle that is being formed. In the above case, the index may be ready to break in one direction or the other, and the odds favor the downside direction.
If it turns out to be a continuation pattern, meaning it will soon break out on another leg down, it is likely to equal the distance of the widest part of the triangle. This is about 145 points – let's say another 150 points to the downside. A downside breakout, if it occurs, would probably be from the 1900 area, so that gives a target of 1750. From the May closing high of 2130, the S&P dropping to 1750 would represent an overall pullback of 18%, which would leave it right on the edge of bear market territory.
The Dow Jones Industrial Average, the NASDAQ Composite, and the Russell 2000 show similar coiling patterns. Good economic news could come out this week and change the picture. But until that happens, the safe bet is to assume there is more downside to come in the near future, with the possibility it could turn into a true bear market.
At 4 hours to go before the U.S. markets open today, futures are on the upside on hopes for Chinese stimulus. It appears we'll have a strong up-day. But keep an eye on the S&P 500. I doubt the positive news will have a lasting effect. If this rebound peters out around the 1970 level, and then drops back to the 1900 area over the next few sessions, watch for a breakout on the downside.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, please click on the following link: www.markettamer.com/seasonal
Copyright (C) 2015 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com.
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