Directional Traders Beware of SPX Chop Ahead
Updated
Primary Chart: SPX Symmetrical Triangle Suggests More Chop Lies Ahead
Larger-Degree Symmetrical Triangle Suggests More Chop Looms Ahead in September 2022
SPX has formed a larger-degree symmetrical triangle on the daily time frame. This is shown on the Primary Chart above. The triangle is valid because it is composed of a series of at least two or more rallies and declines lower. The two major rallies that touched the higher trendline ended on March 29, 2022 and August 16, 2022. The higher trendline connects as well with the January 4, 2022, high at 4818.62 SPX.
The higher trendline of the triangle is essentially the downtrend line for this entire bear market that started at SPX's all-time high on January 4, 2022. And the lower trendline has been touched five times, starting at the June 17, 2022, low.
A triangle is essentially a consolidation pattern. This is why chop may be in store for SPX in the weeks ahead as the apex of the triangle nears the price. Note how price founds support this week at the triangle's lower trendline (an upward trendline) after a vicious selloff that started at the August 16, 2022 peak.
Symmetrical triangles are also called coils because price and volume contract as the price range narrows as the pattern progresses. Price has clearly contracted because price has been contained within the triangle's converging trendlines. Volume has also contracted somewhat since the lower trendline of the triangle began to form at the June 17, 2022 lows. (Volume is not shown on the primary chart above.)
If the lower trendline is broken, price will likely begin a substantial directional move. A measuring objective for a symmetrical triangle takes the maximum distance of the triangle at the June 17 low and projects that from the breakout point. But note that a backtest often occurs to wipe out any traders who jumped into positions on the breakout.
VWAP and Gap Area Could Draw Price Back into Triangle Next Two Weeks
The YTD anchored VWAP lies at 4217 SPX. This VWAP currently sits right in the center of a major gap from August 19-20, 2022. Price could be drawn into the triangle again for an attempt at this gap file and retest of the VWAP. This is not necessarily a high-probability target given that daily trends have turned down, but it is a plausible target with a rational explanation, especially since price stopped falling right at the lower trendline of the triangle last week.
SPX Resistance and Support Levels to Watch This Week
Key levels of resistance and support are shown on the supplementary chart below. For tomorrow, SPX will need to move above 3941 and eventually 3980 and 4000 for a move back to the center of the triangle to be sustained. The center of the triangle lies right near the head and shoulders neckline (see linked post on SPX H&S pattern where SPX broke down on August 26, 2022. This head-and-shoulders neckline at 4125-4130 also represents an area of resistance and a plausible target for SPX to rally to before resuming any decline.
If the upward trendline that is the lower edge of the triangle breaks, then the outlook becomes more immediately bearish, though a whipsaw move may be expected in this very tricky market.
The lower edge of the triangle lies at 3915-3925 over the next several days. This is a major level to continue to watch. Coinciding with this upward trendline (lower edge of triangle) are key Fibonacci levels at 3870, 3899, and 3941.
Supplementary Chart A: Key Levels of Resistance and Support for the Next Two Weeks
Short-Term Targets to the Upside and Longer-Term Targets to the Downside
Ichimoku Cloud support also aligns with these support levels identified. Because of such strong support coming in around 3870-3925, from Fibonacci, up trendline at the lower edge of a larger triangle, and Ichimoku cloud, my forecast is that price likely bounces into mid-September 2022. Conservative upside targets = 3997-4003 and 4023 and 4062. Each target will become more likely if the lower target just beneath it can be met and held first.
Supplementary Chart B: Key Ichimoku Cloud Support at 3921
Supplementary Chart C: Key Ichimoku Resistance at Kijun Line (Blue) at 4003
While this post leans cautiously long in the very short term, in the longer-term, this post suggests that the bear market will likely continue given the macroeconomic environment and the Federal Reserves continued policy of tightening financial conditions. The lower trendline of the triangle may break to the downside later this year in October or November 2021. Or perhaps a breakout to the upside occurs to fake out market participants before another major move lower—this type of price action can occur with symmetrical-triangle consolidations. SPX 3870 and 3721 (July 14 low) both are likely targets for SPX price in the coming months, though no prediction about when price reaches these targets is made.
It also helps to keep an eye on interest rates and whether they continue holding their own upward trendline, and whether they chop or continue exploding higher.
Supplementary Chart D: Interest Rates Represented by TNX (10-year yield)
Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
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Larger-Degree Symmetrical Triangle Suggests More Chop Looms Ahead in September 2022
SPX has formed a larger-degree symmetrical triangle on the daily time frame. This is shown on the Primary Chart above. The triangle is valid because it is composed of a series of at least two or more rallies and declines lower. The two major rallies that touched the higher trendline ended on March 29, 2022 and August 16, 2022. The higher trendline connects as well with the January 4, 2022, high at 4818.62 SPX.
The higher trendline of the triangle is essentially the downtrend line for this entire bear market that started at SPX's all-time high on January 4, 2022. And the lower trendline has been touched five times, starting at the June 17, 2022, low.
A triangle is essentially a consolidation pattern. This is why chop may be in store for SPX in the weeks ahead as the apex of the triangle nears the price. Note how price founds support this week at the triangle's lower trendline (an upward trendline) after a vicious selloff that started at the August 16, 2022 peak.
Symmetrical triangles are also called coils because price and volume contract as the price range narrows as the pattern progresses. Price has clearly contracted because price has been contained within the triangle's converging trendlines. Volume has also contracted somewhat since the lower trendline of the triangle began to form at the June 17, 2022 lows. (Volume is not shown on the primary chart above.)
If the lower trendline is broken, price will likely begin a substantial directional move. A measuring objective for a symmetrical triangle takes the maximum distance of the triangle at the June 17 low and projects that from the breakout point. But note that a backtest often occurs to wipe out any traders who jumped into positions on the breakout.
VWAP and Gap Area Could Draw Price Back into Triangle Next Two Weeks
The YTD anchored VWAP lies at 4217 SPX. This VWAP currently sits right in the center of a major gap from August 19-20, 2022. Price could be drawn into the triangle again for an attempt at this gap file and retest of the VWAP. This is not necessarily a high-probability target given that daily trends have turned down, but it is a plausible target with a rational explanation, especially since price stopped falling right at the lower trendline of the triangle last week.
SPX Resistance and Support Levels to Watch This Week
Key levels of resistance and support are shown on the supplementary chart below. For tomorrow, SPX will need to move above 3941 and eventually 3980 and 4000 for a move back to the center of the triangle to be sustained. The center of the triangle lies right near the head and shoulders neckline (see linked post on SPX H&S pattern where SPX broke down on August 26, 2022. This head-and-shoulders neckline at 4125-4130 also represents an area of resistance and a plausible target for SPX to rally to before resuming any decline.
If the upward trendline that is the lower edge of the triangle breaks, then the outlook becomes more immediately bearish, though a whipsaw move may be expected in this very tricky market.
The lower edge of the triangle lies at 3915-3925 over the next several days. This is a major level to continue to watch. Coinciding with this upward trendline (lower edge of triangle) are key Fibonacci levels at 3870, 3899, and 3941.
Supplementary Chart A: Key Levels of Resistance and Support for the Next Two Weeks
Short-Term Targets to the Upside and Longer-Term Targets to the Downside
Ichimoku Cloud support also aligns with these support levels identified. Because of such strong support coming in around 3870-3925, from Fibonacci, up trendline at the lower edge of a larger triangle, and Ichimoku cloud, my forecast is that price likely bounces into mid-September 2022. Conservative upside targets = 3997-4003 and 4023 and 4062. Each target will become more likely if the lower target just beneath it can be met and held first.
Supplementary Chart B: Key Ichimoku Cloud Support at 3921
Supplementary Chart C: Key Ichimoku Resistance at Kijun Line (Blue) at 4003
While this post leans cautiously long in the very short term, in the longer-term, this post suggests that the bear market will likely continue given the macroeconomic environment and the Federal Reserves continued policy of tightening financial conditions. The lower trendline of the triangle may break to the downside later this year in October or November 2021. Or perhaps a breakout to the upside occurs to fake out market participants before another major move lower—this type of price action can occur with symmetrical-triangle consolidations. SPX 3870 and 3721 (July 14 low) both are likely targets for SPX price in the coming months, though no prediction about when price reaches these targets is made.
It also helps to keep an eye on interest rates and whether they continue holding their own upward trendline, and whether they chop or continue exploding higher.
Supplementary Chart D: Interest Rates Represented by TNX (10-year yield)
Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
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After a sharp selloff right at the open, SPX looks like it has recouped the upward trendline (lower edge of the triangle) and the .618 retracement of the recent 3-month rally at 3899. If 3899/3900 and 3915 hold, then price can still likely move back toward the center of the triangle in line with the choppy view presented above.
Note
After putting in a swing low on September 6 just below 3900, SPX had a large bullish candle yesterday. It bounced right off the upward trendline support (the lower edge of the triangle). Trading hasn't been in a straight line or easy. It's been choppy intraday just like the choppiness in longer-term trends. This morning (September 8) saw a sharp selloff in SPX and other indices at the open, followed by a strong rally, followed by another sharp and violent -1.40% selloff from the intraday peak followed by another strong rally. See the purple line tracing out September 8's selloffs and rallies. Extremely tough sledding for swing traders and even day traders.
In the larger picture, though, the .618 retracement of the entire rally from June 17 to August 16 held (for now) as support -- this lies at 3899. And the lower trend line of the triangle has also held as support (for now). As discussed, price has begun moving back into the middle part of the triangle.
Next key resistance = 4019.
Trade closed: target reached
All of the conservative upside targets = $3997-4003 and $4023 and $4062 have been reached within 4 days, in about half the time expected (this post anticipated a bounce into mid-September). This post was published September 5, on a market holiday when the NYSE was closed, and the prior session's close on Sept. 2 Friday was SPX 3924. So SPX has moved from a close of $3924 when this was published to $4063 today—a total of about $139 points higher. Price could continue up another $60 on SPX into next week, perhaps more, but it could also reverse at any time given the strength of the declines from mid-August.
In sum, the more aggressive target at SPX $4125 has not been reached, but could be reached soon. Any counter-trend trade playing this bounce off the lower trendline of the triangle becomes more risky as price proceeds higher given the bear market YTD.
Note
Note:It's always prudent not to press a directional trade idea when the conservative targets are reached in half the anticipated time.
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