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Two Pattern Tests For The S&P 500 Index

12/02/03 08:32:01 AM
by Gary Grosschadl

This broad index is testing two patterns at the same time. Success or failure here could result in a bold move up or down. Which will it be?

Security:   $SPX
Position:   Hold

This 6-month daily chart shows the S&P 500 index in a rising trend but two patterns suggest danger ahead. The pitchfork in blue shows the lower median line was violated to the downside two weeks ago. This often means the trend may be changing as far as the pitchfork is concerned. Patterns are often tested after their initial failure or breakout and this may be a test of the lower median line. A thrust above this lower blue line towards the (center) median line shows the bulls are back in charge, and the upwards pointing pitchfork still rules dominant. However the other side of the coin says failure here will lead to a downleg.

The other pattern on this chart is a bearish rising wedge in red. Three weeks ago the SPX had a three day downturn to about 1045 where it reversed and headed back up. After that reversal I was more confident in drawing in a lower trendline established by three points, which produced the wedge formation. That upleg was halted at the upper trendline and a bigger reversal ensued which broke below the wedge. Now this pattern, like the pitchfork, is being retested. The repercussions are the same. A bullish move back inside the wedge will also be close to breaking above the wedge and into new highs, which would negate the bearish implication of this pattern.

Daily chart of the $SPX showing two patterns.
Graphic provided by:
Should a serious downleg develop, three downside targets are indicated if the initial support at 1030 fails. The first is 1018 which is close to a previous hammer candlestick, the next is the wedge target at 1000 derived from the vertical measure from the bottom of the wedge, up to the upper wedge trendline and applied from the initial downside break. A lower target is also indicated at 990, which lines up with a previous low and the 200-day exponential moving average.

A comment on several indicators -- The directional movement indicator at the top of the chart shows a weak ADX of 15.1. This hints at poor trend strength, making a bold move up less likely. The stochastics indicator shows an overbought reading quickly approaching. A downturn from the 80 level often signals the start of a downleg. The MACD (moving average convergence/divergence) indicator shows a negative divergence to price action as does the CMF (Chaikin money flow) indicator. These negative divergences also throw doubt into upside possibilities in the near-term for this index.

So, in summary, an important test of this index is likely occurring in the next two weeks. I am leaning toward downside possibilities but a bold move up with some volume conviction would negate this bearish view.

Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

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Date: 12/06/03Rank: 4Comment: 
Date: 12/06/03Rank: 4Comment: 

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