Topping Pattern Or Just Consolidation?

The Transportation Index, which typically leads the US stock market by 2 to 4+months, has been unusually aligned with the S&P 500 over the past 8+ months. Recently, though, the Transportation Index has rallied up to recent new all-time highs (over the past 9+ months) and has rotated lower – below resistance near 11,440 (the MAGENTA LINE on the first chart). Our researchers are warning us that any continued breakdown below this level could prompt a bigger downside market move.

Is recent rotation a topping pattern or just consolidation?

Currently, the US stock market has rolled into a sideways/topping pattern. After the peak in metals setup near August 7, 2020, the US stock market continued to rally a bit higher, then rotated lower on September 3, 2020. The Transportation Index rolled over on September 3 but climbed higher less than 5 trading days later – breaking above the highs set before the COVID-19 peak.

We’ve suggested a “Bull Trap” pattern may be forming in the major markets, and we’ve urged traders to be cautious regarding the new price highs and appearance of a continued upside price rally. The Bull Trap pattern, sometimes called a “Scouting Party,” happens when price breaks above resistance (or below support) briefly in an attempt to establish a new trend. If the price fails to find support after breaking above the previous resistance level, it typically rotates lower and collapses back below the resistance level (attempting to find a lower support level).

If our research is correct, the recent rotation in the Transportation Index may suggest a Bull Trap pattern has set up and completed (with the price falling back below the 11,440 level). If this trend continues, we may see a much bigger downside price move where price attempts to find support near 9,800 or 9,200. Continue reading "Topping Pattern Or Just Consolidation?"