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BROADENING FORMATION


Competing Patterns In The S&P Small Cap Index

04/08/04 08:59:42 AM
by Arthur Hill

The S&P Small Cap Index ($SML) remains in a clear uptrend, but a reversal pattern could be taking shape.

Security:   $SML
Position:   Hold

First and foremost, the current trend is clearly bullish with higher highs and higher lows. A trendline extending up from Aug-03 has been touched three times, with the most recent bounce in late March. By drawing a parallel line above this one, a rising price channel evolves and the trend is firmly bullish as long as this channel holds.

Graphic provided by: MetaStock.
 
Even though the rising price channel dominates the landscape, a long-winded reversal pattern appears to be forming. From the Encyclopedia of Chart Patterns, Thomas Bulkowski refers to this as a "right-angled" and "ascending broadening formation." The magenta trendlines shows equal lows in February and March as well as rising highs in January, March, and now April. The black vertical line from 294 extends down to support to give the pattern a right-angle.

According to Bulkowski, these are bearish reversal patterns that can last up to three months. The current pattern is entering its fourth month. Confirmation would come with a support break at 272 and the projected decline would go to around 250 (295 - 272 = 23, 272 - 23 = 249). The height of the pattern is subtracted from the breakout to find a target. As long as the index remains above support at 272, the pattern is confirmed and the trend remains bullish.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title: Editor
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