Potential Bearish Butterfly Spotted Inside Rising Channel SPX
Inside the rising channel , a potential bearish butterfly pattern has appeared. If you're not sure what that pattern should look like, please consult Scott Carney's website for details. It's a 'W' type pattern. I will discuss two potential short entry points, but before I do, please note that a commonly accepted rule in trading is to NOT make an entry against the trend. In this particular case, it's shorting against a rising channel . I could dive into the mathematical explanation behind this rule, but that could be reserved for another post in the education section. So unless you're willing to accept the risk for bucking the trend, then go for it. If the following analysis comes to fruition, it could pay out handsomely.
Potential Short Entry #1: If SPX reaches very close to the 3025 area (127% XA and 161.8% BC projections for D point completion), short the index. Timing for pattern completion is about 161.8% of the time it took to form the left half of the 'W' formation. Therefore, it could be reasonably expected for the right half of the 'W' formation to complete on 07/25/2019 @ about 1:30PM EST and leaving a few hours of leeway. Moreover, the RSI(14, close) is near 80 on the 30m time frame and is currently 65 on the daily. The profit target is the bottom rising trend line of the rising channel . This target may be a value of 3000 as soon as 07/26/2019, but may be a bit higher if it takes longer for the market to move down. There is always the possibility of an aggressive trend break on the down side, taking the index much lower than 3000. Scott Carney has mentioned that Harmonic patterns typically work well in testing/retesting support/resistance areas. Of course, they don't always work, so due diligence and risk management is still required. Stop loss could be at 3032 (141.4% of XA), then move on and wait patiently for potential short strategy #2.
Potential Short Entry #2: If SPX reaches the upper rising trend line of the rising channel , short the index. The target is the bottom rising trend line of the rising channel . This target may be hit as soon as the week starting 07/29/2019, which contains the FOMC day on 07/31/2019. Again, there is always the possibility of an aggressive trend break on the down side, taking the index much lower than the bottom rising trend line in the rising channel . Stop loss could be just a few points above your entry. Price action beyond that area may imply the market is starting to go parabolic/euphoric.
Again, bucking the trend is a dangerous way to trade, but there are times when it really pays off.
Potential Bullish Entry: When SPX hits the bottom rising trend line in the rising channel , buy the index. You could use 2 targets. First target could be the half way point in the rising channel (calculated to be the midpoint of the line segment perpendicular to the rising channel at the most recent candle stick or bar in question). Second target, albeit more aggressive, is the top rising trend line in the rising channel . Stop loss could be just few points when a decisive break below the bottom rising trend in the rising channel looks very clear. That particular case may actually be a signal to stop out the long position, then go short since the price action may be indicating the end of a rally that lasted more than 2 months.
Potential Short Entry #1: If SPX reaches very close to the 3025 area (127% XA and 161.8% BC projections for D point completion), short the index. Timing for pattern completion is about 161.8% of the time it took to form the left half of the 'W' formation. Therefore, it could be reasonably expected for the right half of the 'W' formation to complete on 07/25/2019 @ about 1:30PM EST and leaving a few hours of leeway. Moreover, the RSI(14, close) is near 80 on the 30m time frame and is currently 65 on the daily. The profit target is the bottom rising trend line of the rising channel . This target may be a value of 3000 as soon as 07/26/2019, but may be a bit higher if it takes longer for the market to move down. There is always the possibility of an aggressive trend break on the down side, taking the index much lower than 3000. Scott Carney has mentioned that Harmonic patterns typically work well in testing/retesting support/resistance areas. Of course, they don't always work, so due diligence and risk management is still required. Stop loss could be at 3032 (141.4% of XA), then move on and wait patiently for potential short strategy #2.
Potential Short Entry #2: If SPX reaches the upper rising trend line of the rising channel , short the index. The target is the bottom rising trend line of the rising channel . This target may be hit as soon as the week starting 07/29/2019, which contains the FOMC day on 07/31/2019. Again, there is always the possibility of an aggressive trend break on the down side, taking the index much lower than the bottom rising trend line in the rising channel . Stop loss could be just a few points above your entry. Price action beyond that area may imply the market is starting to go parabolic/euphoric.
Again, bucking the trend is a dangerous way to trade, but there are times when it really pays off.
Potential Bullish Entry: When SPX hits the bottom rising trend line in the rising channel , buy the index. You could use 2 targets. First target could be the half way point in the rising channel (calculated to be the midpoint of the line segment perpendicular to the rising channel at the most recent candle stick or bar in question). Second target, albeit more aggressive, is the top rising trend line in the rising channel . Stop loss could be just few points when a decisive break below the bottom rising trend in the rising channel looks very clear. That particular case may actually be a signal to stop out the long position, then go short since the price action may be indicating the end of a rally that lasted more than 2 months.
Comment:
I forgot to mention an interesting, yet very important observation that I've seen many times over the years at multiple chart time frames with regards to the Bearish Butterfly pattern. I noticed that sometimes they pinpoint the exact top of the head in a Shoulder-Head-Shoulder pattern formation. This makes sense because of the way the 'W' structure was formulated in terms of the 127% XA and 161.8%-224% BC projection requirements.