Breakout Watch: Descending Triangle In Both The SPY And S&P 500

The dominant short-term pattern on the S&P 500 (^GSPC) (and SPY ETF (SPY)) appears to be a consolidating descending triangle.  Let’s take a look at the pattern on the 60 min and daily charts.

SPY (S&P 500 ETF) 60-min chart:

Classic Technical Analysis texts teach that descending triangles should be expected to resolve to the downside, but that’s not always the case.  All triangles are consolidation patterns that represent a ‘pause’ (or correction) in a trend and it can be very difficult to predict accurately in which direction price will eventually expand.

A clear down-sloping trendline connects the four swing highs in May while a clear horizontal line about the $88.50 level connects key lows on a visual support area.

In the SPY, the key levels to watch for a breakout are $91.50 on the upside and $88.50 on the downside… though it looks like this triangle consolidation could last a few more days or even weeks until we get closer to the apex (point where the trendlines touch).  Price can be expected to break anywhere from 66% to 75% or more of the way to the actual apex.

Let’s set this pattern up in the larger context of the S&P 500 daily chart:

There’s actually support coming in from the rising 20 day EMA which might even be more important than the horizontal trendline at 880.

With a market in consolidation mode, it’s often best to wait it out to see which side (bulls/bears) becomes victorious in the supply/demand battle.  Remember, it’s supply/demand that rules markets, not arbitrary chart patterns and there’s no crystal ball to the future - only odds and probabilities in conjunction with clearly defined expected support and resistance.

Also, if you look very closely, you’ll see that we’re ‘trapped’ between support off the February highs and also resistance off the January highs - that’s adding more complexity to the mix.

The lines are clearly drawn and the risk/reward established.  It’s only a matter of waiting to see (and trade) the eventual breakout move that is likely to come.

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