Tuesday, February 10, 2015

A Rising Bearish Wedge Pattern Is Developing In the S&P 500 Index

Near the end of October last year the S&P 500 Index moved into a sideways trading range that has seen the market move back and forth between 1,975 and 2,093. Then on December 19, a spike in up volume occurred that created the top of this trading range. Subsequent to this capitulation buying the market has struggled to recapture this December high mark with the market trading action forming a rising bearish wedge pattern. A rising wedge pattern tends to resolve itself with a market that breaks to the down side. Several highlights from the below chart.
  • The rising wedge is noted by the solid green and solid red lines. Also, the market is making lower highs as evidenced by the red dashed line.
  • The full stochastic indicator turned negative today with the fast green line dipping below the slower moving red line. This negative divergence has occurred at a level where the stochastic indicator shows the market is short term overbought.
  • Lastly, the on balance volume indicator (OBV) has trended lower since the start of the year. With the OBV, it is the trend of the line that is important. As noted on the stockcharts.com website, "OBV rises when volume on up days outpaces volume on down days. OBV falls when volume on down days is stronger. A rising OBV reflects positive volume pressure that can lead to higher prices. Conversely, falling OBV reflects negative volume pressure that can foreshadow lower prices." The OBV often moves before a stocks price.

From The Blog of HORAN Capital Advisors

To provide another market perspective, Charles Kirk of The Kirk Report always provides insightful technical analysis during the week (small subscription required). In his strategy report tonight, he provides the below chart of the S&P 500 Index graphed in a 30 minute time frame and included the following analysis,
"By closing above swing resistance at S&P 2064 today, a new smaller bullish range breakout setup with a target at S&P 2141 has now triggered. Today’s rally also further developed the handle on the new cup setup we talked about in yesterday’s report and which you can also see in the 30 minute view below but needs to trade above last Friday’s intraday high at S&P 2072 to fire."
From The Blog of HORAN Capital Advisors

"With the attempted small range breakout in motion, it is now important that we see sustained bullish upside follow through to confirm. The first step would be to clear and hold above last Friday’s high at S&P 2072 and then take out the prior early December swing high at S&P 2079. If those levels are broken all that would remain is the December high at S&P 2093. If we are to now move away from this multi-month trading range, we will need to see sustained bullish upside follow through. In sum, this is the bulls’ best chance yet to try to put this trading range behind it. Whether it can hold above the smaller range is key."
In conclusion, I think Charles Kirk's analysis and mine are telling a similar technical story. The key is the fact the market needs to break resistance at the S&P 500 December high of 2,093. However, I believe the on balance volume indicator and the stochastic indicator are suggesting the market may trade lower before pushing through this December high level.


Martin @ hellosuckers.net said...

I disagree with this assessment. I think we were in a consolidation channel and not a wedge. It looks like time is proving it.

David Templeton, CFA said...


Thanks for the comment. As with all technical analysis, the eye is in the beholder. The reason for the chart point of view was to note the wedge was "developing". With all technical analysis, some patterns "trigger" while others are killed off by market action. In the case of the rising wedge, I do not disagree that the market could have broken out from a sideways trend. However, I do think the wedge is still developing and has not been killed off yet. On the other hand, I think it is important the market broke through the December 29th high and believe this breakout is important.