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

Possible Bullish Bottom Triangle Wedge Pattern on S&P 500 Stock Market?

Looking at the S&P 500 Stock Chart, we noticed that the S&P 500 ($SPX) may be within a bullish Bottom Triangle Wedge Pattern.

According to the Trending123 website, a Bottom Triangle/Wedge is a possible bullish reversal pattern.

"These patterns have two converging trend lines. The pattern will display two highs touching the upper trend line and two lows touching the lower trend line.

This pattern is confirmed when the price breaks upward out of the Triangle/Wedge formation to close above the upper trend line.

Volume is an important factor to consider. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when the breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about decisions based on this Triangle/Wedge."

As the website suggests, the reversal won't occur after a successful breakout with good volume above the upper trend line of the Triangle/Wedge Pattern.

As of Wednesday, October 22, 2008, we are at the bottom end of the triangle, and if the pattern holds, we may eventually get a breakout on the upside.

But as with all patterns, patterns are not guarantees and patterns can fail.

For more details of the Bottom Triangle Wedge Pattern, see the Trending123 Article on this.


Today's S&P 500 Stock Chart