Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Revisiting The Excess Phase Peak Pattern

Published 08/03/2021, 12:45 AM
Updated 07/09/2023, 06:31 AM

The setup of the Excess Phase peak pattern consists of an exuberant rally to a peak (Phase #1), followed by a moderate price correction that sets up into a sideways flagging pattern (Phase #2). If the INDU and TRAN continue to move in a sideways flagging formation after recently moving moderately lower, we may start to see a new Excess Phase Peak setup in these two major indexes. This could be a warning of a much bigger breakdown in trends in the near future.

INDU Must Rally Above$35,300 To Break Away From Excess Phase Peak

The Weekly INDU chart, below, highlights the five phases of the Excess Phase Peak formation and also highlights a GREEN “break-away” rally trend that could setup to end any potential Excess Phase Peak formation. If the markets resume the rally trend and the INDU rallies above $35,300 soon, we would consider this a new “break-away” rally trend – potentially ending the Excess Phase Peak pattern setup. If the INDU fails to rally above $35,300 and trades within the Phase #2 sideways flag range, then breaks downward, this type of price action would confirm the Phase #3 breakdown price trend that sets up intermediate support and the eventual Phase #4 sideways consolidation.

Remember, the phases of the Excess Phase Peak pattern are fairly easy to identify.

  • Phase #1: The rally to the ultimate peak level.
  • Phase #2: The breakdown of that peak level, setting up the initial support level and prompting a sideways price Flag/Pennant price channel.
  • Phase #3: The breakdown of the #2 sideways price channel leading to a steep decline to intermediate support – which acts as a temporary sideways bottom.
  • Phase #4: The breakdown of the intermediate support level which ultimately leads to the strongest price decline targeting the ultimate bottom in price.
  • Phase #5: Identifying the ultimate bottom/momentum based in price. This trending phase can last many months (possibly more than 12 months at time), or could be in the form of a deep “V” bottom.

Once the breakdown of the Phase #2 flagging formation is confirmed, we start to look for confirmation of the Phase #3 intermediate support level and the eventual Phase #4 breakdown of that support level.

If the INDU rallies above the recent all-time highs and breaks-away from the sideways flag ranges, then we would consider that new high as a new bullish price trend – negating the Excess Phase Peak Phase #2 setup completely. Obviously, any new all-time high/rally could eventually setup another Phase #1 peak and Phase #2 sideways flagging channel at any time in the future.

Near the lower area of this chart, we’ve highlighted the On Balance Volume trend and how it has recently started to trend lower. We would expect any continued upside price trending to support an increasing OBV level as accumulation takes place in the markets. Failure to see the OBV level rising as price rises may suggest a “false break-away” in trend.

DJIA Weekly Chart

TRAN Mirroring Excess Phase Peak Flagging Setup – What Next?

This Weekly Transportation Index chart should appear very similar to the INDU chart (above). The unique similarities of these two charts, one addressing the Blue Chip US economy and the other addressing future US transportation expectations related to economic activity, suggests traders may be shifting away from a reflation recovery after the FOMC statements last week. We are starting to see traders/investors reevaluate the capability of the US economy to continue the rally trends as they have since November 2020. Could this shift in investor sentiment prompt a broader market price setup? Is it warning of an Excess Phase Peak setup in the making?

Right now, we only have confirmation of a recent all-time high peak and the start of what appears to be a sideways Flagging price channel. We won’t know if the Excess Phase Peak pattern is truly confirmed until we see how the current sideways Flagging price channel concludes.

If it breaks downward, then we’ll have confirmation of a Phase #3 Excess Phase Peak stage that will alert us that a bigger downside price trend is pending. If it breaks higher, and takes out $16,175, then we’ll consider this new rally high an end of the current Phase #2 setup and expect prices to continue rallying to new highs.

Transportation Index Weekly Chart

As we move past Q2:2021, it is important to understand that market price volatility should begin to increase as earnings and forward expectations continue to flood the news wires. We are only one month into the new quarter and we believe the markets are likely to trend sideways through to the end of the month.

It makes sense to us that the broader markets, and investors, are searching for more clarity and reason to be bullish after such an extended price rally. Time will tell how this plays out, but one thing is certain: Q2:2021 earnings and forward expectations will likely continue to drive trader/investor sentiment over the next several weeks. Expect an increase in volatility and some potential surprises.

Consider this message an early warning if the Excess Phase Peak setup continues and confirms the Phase #3 breakdown of the current sideways Flagging setup.

Latest comments

Thanks Chris, your articles are awesome.
Thanks for the article, cheers
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.