S&P 500 (SPX) – Rising Wedge Chart Formation

I charted the S&P 500 index after the markets closed on Friday, November 4, 2009 when the SPX finished the week at 1,105.98.

I drew two sets of trend lines today.  The large bold lines are the longer-term trends.  The thin blue lines are shorter-term, but could be telling on the SPX’s next move.  Looking at the bold lines you can see SPX is in the middle of its trading channel.  The last time it came close to the upper trend line of higher highs was in mid-October.  That’s given the lower trend lines of higher lows time to catch up some.  The two lower trend lines mark the more consistent trend of higher lows over the past four plus months and the rarely touched, but quite important, line that started almost five months ago.  I’d be shocked to see the SPX close to its upper trend line before touching one of the lower trend lines again, but the end of the year can often bring interesting price action.

The thin blue lines are the ones to watch for now to see which way will it will tilt for the longer trend.  The rising wedge chart formation over the past few weeks is often looked at as a bearish pattern where the breakout tends to be to the downside.  This wedge is getting so tight now that we’ll get confirmation within a few days on which side wins.  If the shorter (nearly flat) trend line breaks and the SPX hits new highs the other thin blue line isn’t far away and is still part of a longer-term rising wedge pattern.  Be careful not to get suckered in if we head to that level.

In addition to the short trend lines helping the bulls right now are the moving averages.  The S&P 500 found support this past week from its 10 and 20 daily moving averages (dma).  The 10 dma broke early, but came back for support later.  The 20 dma broke intraday for a couple of hours on a few days, but came back to finish each day above the line.  The bears will point to the crack in the armor as an opportunity arising.  If those lines break, that’ll mean the wedge I described in the paragraph above has broken and the bears could have a field day selling without many buyers coming in to fight against them.  The biggest test will come at the 50 dma which just happens to line up with the longer-term trend line of higher lows.  That’s going to be a crucial point to watch.

Volume has remained low, aside from the past two day’s higher than normal levels, but this low period includes Thanksgiving week.  So, take it with a grain of salt.  Williams %R fell below overbought on the 14 day period, but hasn’t broken yet on the 28 day period.  Both lines need to fall lower before I can see a really serious correction coming.  Waiting for that indicator to show its colors will mean you sell later than you could have, but could also keep you from selling too soon.