S&P 500: Another Ascending Wedge

About six weeks ago the S&P 500 (^GSPC) had worked itself into a bearish ascending wedge pattern. In my May 8 article I said that the pattern was “virtually guaranteed” to resolve downward, but that I didn’t think the decline would last very long or go very far. As it happens, that is what came to pass. Now we find ourselves in a similar situation, with the 200-EMA resistance preventing the price index from getting to the top of the rising trend channel and putting the top line on the wedge.

As I said in the May 8 article, ascending wedges can resolve to the upside, but I don’t see any concrete evidence that would make me think that is going to happen to this particular wedge. The price index has been edging sideways and very slightly higher, and, as you can see on the chart, volume is contracting.

There are also some medium-term negative divergences beginning to appear, such as on the McClellan Summation Index chart below.

Another negative divergence is evident on the Volume Trend Oscillator (VTO) chart.

In my analysis I noted that negative divergences are not yet in abundance, but their appearance in the context of a secular bear market is a reminder that the current rally is probably more vulnerable than many think.

Bottom Line: The ascending wedge formation is likely to break downward, but it is a short-term issue at this point. The difficulty the market has had getting above resistance might be overcome if there were a modest correction before another breakout is attempted; however, cracks are beginning to appear in the medium-term picture, and any correction should not be fully embraced as positive until it is clear that it is over.

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