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BROADENING FORMATION


Ranged Break

05/30/07 09:27:00 AM
by Austin Passamonte

An expanding wedge coupled with a narrow-range channel spelled imminent action for the S&P.

Security:   S&P 500
Position:   N/A

Heading into a holiday weekend is usually light volume, bullish market action. The Standard & Poor's 500 shot up above its all-time closing high each day this week, only to close slightly below at the end. It seemed to be a given that big-money players would hold that historical print past the close. See Figure 1.

FIGURE 1: S&P 500 EMINI FUTURES (ES)
Graphic provided by: TradeStation.
 
Logic and reason have little to do with financial market action in general, trading in particular. Thankfully, we have technical analysis to measure our way through pending price action.

From Monday through Wednesday, the S&P 500 (emini futures shown) held within a sideways range of less than 10 index points. That type of comatose market (in)action simply cannot last. When it breaks, the directional burst is usually substantial.

In the process of channeling sideways, the index also formed an expanding wedge pattern, which is bearish. Instead of coiling into a consolidation pattern of stored energy, an expanding wedge is literally expending energy. When the pattern breaks, it is usually downside.

A bearish overall price pattern coupled with small-range, sideways price action had stock indexes poised for a directional push. Once it broke, sell signals from 1525 down to 1515 offered numerous intraday short trades in succession. The S&P has a habit of forming multisession, constricted sideways channels just like this. We'll see the same general setup again down the road and will trade it accordingly.




Austin Passamonte

Austin is a private trader who trades emini stock index futures intraday. He currently trades various futures markets from home in addition to managing a trader's educational forum

Title: Individual Trader
Company: CoiledMarkets.com
Address: PO Box 633
Naples, NY 14512
Website: coiledmarkets.com/blog
E-mail address: austinp44@yahoo.com

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