S&P500 Update: Upside resolution of a downside set up.

Last week I reviewed the NASDAQ’s big picture and shorter-term chart patterns. As a symmetrical triangle was forming after a decline, standard charting then expects a next leg down. Instead the markets fooled the majority, including me, and resolved to the upside. How’s that possible?!

Well, its all about odds. Such standard/text book price structures need to be assessed from their most likely follow through perspective and that is ~90% odds. ~10% off the time it resolves the exact opposite way: nothing works 100% of the time in the markets. So show me a triangle like that with downside initiation and I will therefore expect a downside resolution. Unfortunately, this time we experienced the 10%: impossible to know beforehand.

That said, short-term the markets start to act impulsive again, which is shown in the hourly chart of the S&P500 below. Ideally we now get a small pullback to around SPX2980 and then a rally to SPX3020ish. That would also fulfill the 80/20 “rule”: a trade through 80 -in this case 2980- targets the next 20 -in this case 3020- to ideally complete green (minor) wave-3. A 45+/-5p pullback should then complete green wave-4, to be followed by green wave-5. A move below 2950 will, however, have me question this option.

So where does that leave us bigger picture-wise? A possible diagonal pattern (blue trendlines: black “a, b, c, d, e“) could be forming targeting new ATHs at around SPX3050+/-10p. This fits well with the price targets for minor-5 shown in the hourly chart. Closer to home, the small blue rectangles show that based on symmetry the upside target for this smaller breakout is SPX3020, which fits with the wave-3 target as well.

Since the internal waves off the December low do count best as impulses, it is likely a leading diagonal, which should resolve higher after a substantial correction (SPX2800-2750s)?! But, let’s not worry about that too much for now, but focus on the upside targets going into mid- to late-September. By then the downside risk is likely much higher than the upside potential.

Trade safe!

Arnout, Ph.D.

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