This past February, I drew your attention to the S&P 500 index, which started a consolidation, addressing two critical questions about the future of the index. The most important answer said that we are still in the long-term uptrend and we should keep patience to see the end of the consolidation.
Later in April, I shared an update with you with a detailed plan for two possible options of the ongoing consolidation. The first one implied the development of the familiar Triangular pattern, which in its turn had two possible paths of price action. And the second path with a zigzag inside of the Triangle was drawn with an amazingly accurate prediction as the index just repeated its trajectory.
Another possible option was described within the forecasted Bull Flag pattern. This model didn’t develop as planned as the price couldn’t break below the previous low at $2532; although we were very close to hitting it as the index’s drop reversed just $31 ahead of it at the $2553 level. This plan is very close to invalidation once the price overcomes the earlier top at $2718.
Below I prepared an update of the most valid option for you.
Chart. S&P 500 Weekly: The Index Approaches Triangle’s Apex To Finish Consolidation
Before I get down to the pattern itself, I would like to focus your attention on the orange trendline support built through the lows established in February and October of 2016 to show you the magic power of the trends.
This trendline was attacked several times during the consolidation starting from the most dangerous one at the beginning of February, which has the panic type selling pressure with a high magnitude. As you can witness for yourself, neither one of the drops could breach the orange support, although we can count a few punctures.
The candlestick chart clearly illustrates what was happening in the market. All the candles’ bodies were accurately cut by the trendline only letting the tails or shadows to go through. It means the strong market rejection of the drops as sellers couldn’t stake out the new ground.
The RSI indicator also supports the market as it could stay afloat above the crucial 50 mark after several minor dips occurred in March. Now it’s turning to the North to let the market gain again.
Now let’s get down to the pattern. I highlighted it in the blue converging trendlines. The higher lows and lower tops shaped the Symmetric Triangle, it doesn’t show perfect symmetry, but it belongs to that type of patterns. Also, there are ascending and descending triangle types, all of them are contracting.
As price approaches both the apex of the pattern and its upside, we should watch to see if a breakout occurs soon. The approximate point of penetration is located in the area between $2710 and $2720, which is just around the former top at $2718. I would use this last level as a confirmation trigger.
The target is calculated as the distance of the widest part of Triangle added to the breakout point and is set at the $3050 level. It means a 12% gain for the trade. The invalidation of the pattern is set below the former trough at $2553. The risk/reward ratio is 2, which is good enough. Those who kept patience watching after consolidation for the long four months now could be rewarded.
INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.