The chart above is the second of two charts that I am watching that I believe show what is the current primary trend of the bull market that started in 2009. Part I (linked below) is a look at the primary trend using standard linear price, Part II is the same time period but viewed from a logarithmic price approach. Interestingly, I believe that each chart is currently giving conflicting signals about the current short term status of the market. I believe that this conflict will be resolved soon and thus I think watching both charts has value as each likely offers a look at price levels that other market participants are interested in. These are just my opinion so any comments or criticism why I'm wrong or possibly right is more than welcome.
The Pattern:
For the entire nearly 6 year bull market, prices have been oscillating between an ever tightening range. The fact that pullbacks during the past three years became increasingly smaller led to the development of the Rising Wedge. These are widely considered to be bearish reversal patterns that have a very high probability of breaking to the downside. The rising wedge formed by the SPY can be drawn a couple of ways depending on what is considered the base formation. I believe the lines drawn above are the most important as the trend may be drawn to include the entire bull market rally. Volume has also shown to follow what is expected with a huge spike in volume during the base formation. Then increasingly lower volumes throughout the formation of the wedge as prices increased. And then finally a rise in volume upon a break down below the wedge.
Current Status:
As of last week the SPY price closed below what I believe is the primary lower trend line. This price area looks to be around 193-194 and could be just one of several reasons why the market saw another leg lower late last week.
Short Term Outlook:
Rising wedges are noted as a pattern that do not require confirmation. In that once broken, prices could continue to the downside quite quickly. With shorter time frames on individual stocks this would be normal, but with a 6 yr wedge on a major index the downside move may come more slowly. Most important short term I believe is if we get a bounce do prices retest the down trend line, hit resistance and then continue lower.
Long Term Outlook:
If prices continue to stay below the bottom rising trend line in the short term it is likely that the 6 yr bull market has run its course and a more extended run to the downside is likely. Price objectives on rising wedges can vary with the most aggressive being an entire retrace of the entire bull market run. If this trend above continues to deteriorate then I suspect an initial long term target of ~107-113 is likely. This would be approximately a 45% drop from the ATHs and right into an area that acted both as resistance and support for almost 2 years (Oct09-Oct11). Of course along the way many rallies would be expected at key support areas.
The Pattern:
For the entire nearly 6 year bull market, prices have been oscillating between an ever tightening range. The fact that pullbacks during the past three years became increasingly smaller led to the development of the Rising Wedge. These are widely considered to be bearish reversal patterns that have a very high probability of breaking to the downside. The rising wedge formed by the SPY can be drawn a couple of ways depending on what is considered the base formation. I believe the lines drawn above are the most important as the trend may be drawn to include the entire bull market rally. Volume has also shown to follow what is expected with a huge spike in volume during the base formation. Then increasingly lower volumes throughout the formation of the wedge as prices increased. And then finally a rise in volume upon a break down below the wedge.
Current Status:
As of last week the SPY price closed below what I believe is the primary lower trend line. This price area looks to be around 193-194 and could be just one of several reasons why the market saw another leg lower late last week.
Short Term Outlook:
Rising wedges are noted as a pattern that do not require confirmation. In that once broken, prices could continue to the downside quite quickly. With shorter time frames on individual stocks this would be normal, but with a 6 yr wedge on a major index the downside move may come more slowly. Most important short term I believe is if we get a bounce do prices retest the down trend line, hit resistance and then continue lower.
Long Term Outlook:
If prices continue to stay below the bottom rising trend line in the short term it is likely that the 6 yr bull market has run its course and a more extended run to the downside is likely. Price objectives on rising wedges can vary with the most aggressive being an entire retrace of the entire bull market run. If this trend above continues to deteriorate then I suspect an initial long term target of ~107-113 is likely. This would be approximately a 45% drop from the ATHs and right into an area that acted both as resistance and support for almost 2 years (Oct09-Oct11). Of course along the way many rallies would be expected at key support areas.
