No Foolin'

It was almost 2 years ago I wrote about a developing rising wedge in the SP500 which had potentially bearish implications. As it so happens the bearish breakdown never happened and we continued to push higher. As it turns out, and for all the negative references analysts use to support their arguments as to why prices are going to fall, rising wedges have very poor predictive success. In fact they have one of the worst performance rankings, 20th out of 21 when looking at all patterns.

Fast forward to today and sure enough you can see in the chart below, the SP500 is sporting another rising wedge. The most disconcerting thing about this wedge is the projected target if it were to play out. About 12% lower than from where we closed out Q1. 

For these patterns that actually do breakdown, less than a 50% meet their target price objective (measured move). If you stop and think about it that makes sense because rising wedges typically occur in uptrends, in this case a very strong uptrend. Corrections in strong uptrends are characteristically short and shallow.

So while I don’t want to discount the pattern just because of its low probability, it is helpful to understand target support levels if we do see a breakdown … just in case this one is real. If price breaks the lower blue support line, the next level of support would be just below at the red horizontal price labeled S1, around 2040.  A break below that would find support at S1 around 1990 and finally if that does not hold, I would expect this to be one that falls all the way down to its measured move near 1820.

While I am not predicting a correction, this pattern has my attention. And until this pattern is resolved it is, at a minimum, a warning flag telling me it is not a time to be a hero and put more money into a long (US stock market) equity trade. Of course, things can change very quickly but looking at the bigger picture, there is nothing that is saying this bull market run is over rather we are in the middle of period consolidation in a longer term uptrend.

Have a great rest of the week