The most common patterns are:
- Head and shoulder reversal: This is a long-term pattern best seen on weekly charts. It takes months to develop. It is a very reliable pattern both for indicating a trend reversal and for setting downside targets. This pattern is not on the S&P Index.
- A rounding top: This is also a longer term pattern developing over several months. The pattern is confirmed by a break below the support level and the downside targets have a high probability of being achieved. This pattern is not on the S&P index.
- Significant and sudden compression in the long term group of averages in the Guppy Multiple Moving Averages indicator on a weekly chart: This is not seen on the S&P chart. In fact, we see the opposite, with the long term GMMA well separated, which indicates strong investor confidence. Additionally, the separation between the short-term and long-term groups is wide and consistent. This is another bullish signal.
- A break below a long term up trend line that has been used as a support level: This is a very low probability on the S&P chart with this trend line around 120 index points below the current index value.
- A blow-off top pattern: This is a buying climax with a dramatic increase in the index value and significantly higher volume.
- A move below critical support levels: The S&P is making new highs, so support levels are difficult to identify. However, the S&P has a consistent history of trading in well-defined trading bands. These projected levels have acted as resistance and support level. The S&P index retreat from 2,400 is also a retreat from the trading band target level. Consolidation around these trading and target levels is common. The trading band support level is near 2,260.
- A large increase in the VIX, which indicates the market is expecting a significant change in trend.
A careful analysis of the S&P chart shows no end-of-trend patterns and this suggests that there is a very low probability of a major change in the trend. However, this does not rule out the potential for a retracement and consolidation. This behavior is common in all uptrends and provides a good buying opportunity.
Investors wait for the market to potentially test the lower edge of the short-term GMMA near 2,300. A rebound from this level is a buying opportunity for a continuation of the uptrend. A breakout above 2,400 has an upside target near 2,530. The target is calculated by using trading band price projections — a method we have successfully applied to the S&P to set targets since 2011.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.
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