Stock Market (S&P 500) Breakout Soon! We are near end of Symmetric Triangle

The Stock Market, as represented by the S&P 500 ($SPX), is very near the end of a symmetrical triangle (see chart above).

The Market has gone back and forth inside of this triangle, and the market is consolidating the move from the all time highs. The end of the triangle converges in March, and because there is often a breakout around 1/2 to 3/4s of the pattern, it is about time the market breaks out.

According to Stockcharts.com and Edwards and Magee, "roughly 75% of symmetrical triangles are continuation patterns and the rest mark reversals." Since the previous trend from the all time highs was down, the continuation means further downside.

Previously, this blog analyzed the potential depth of the decline, and we estimated that the downside target is 600 on the S&P 500, a drop of around 27% from here (S&P 500 value of 827). This matches another analysis by this blog which suggested that the long term S&P 500 bottom is from 450 to 600.


Today's S&P 500 Chart

Stocks (S&P 500) Converging and is Breakout Near? Usually a Continuation Pattern (More Downside Ahead?)

U.S. Stocks, as represented by the S&P 500, are converging towards a certain price, forming a wedge or symmetrical triangle pattern.



Chartists and technicians often say that near the end of the triangle or wedge, a breakout could occur with good volume. While the breakout could occur in either direction (up or down), the pattern is often a continuation pattern of the previous trend:

"While there are instances when symmetrical triangles mark important trend reversals, they more often mark a continuation of the current trend. Regardless of the nature of the pattern, continuation or reversal, the direction of the next major move can only be determined after a valid breakout." (stockcharts.com)

Since the previous pattern had been down, this means that the continuation pattern would mean further downside.

Following stockcharts.com recommendation of estimating the strength of the move, we can take the widest part of the symmetrical triangle (approximately from $SPX level 1010 to 740 or so, for a depth of 270 S&P 500 points), and then apply this at the breakout level.

If the breakout occurs near 870, that means that the move could extend down 870 - 270 for a target of S&P 500 600. This lower target of S&P 500 value of 600 matches previous lower target analysis of a bottom of 450 to 600.

But as many sites warn, while the wedge or symmetrical triangle pattern is usually a continuation pattern, it could also be a reversal pattern, so let us observe the breakout and the validity of the move according to stockcharts.com.



Today's Stock Chart