I am writing this post after reading Michael Harris’ article “A Top Formation in S&P 500 Index”. Michael has touched a subject of rigid, straightforward interpretations of consolidation patterns leading to mistaken conclusions of possible outcomes. I couldn’t agree with him more. The human brain is hardwired to look for and find repetitive patterns even in an environment where they don’t exist. Rather than trying to fit the chaotic price movement of a loose consolidation into one of the preconceived patterns let’s look at the ongoing consolidation in the S&P 500 within a broader price action context.
Here is the 2 box reversal P&F SPX chart with a box size equals the ATR (250). The 16 point box size filters daily average (over the last year) noise. Objective trendlines give a good visualization of the trend. We see that since the beginning in the second half of 2012 the current uptrend accelerated two times breaking out of the blue channel and forming two new channels - grey and purple. The upper trendline of the purple channel lies within the grey channel and indicates that the second acceleration was less powerful than the one which had formed the grey channel. However, this fact can hardly prove the trend reversal claim. The price isn’t even close to the lower trendlines. Moreover, it has not violated the interim bullish support line (light blue) yet. A consolidation within an uptrend is considered to be bullish first. Only when the price starts breaking down through the support lines, a possibility of reversal will come into play. Until then let the price dictate trades, not a preconceived opinion.
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Disclaimer: I express only my personal opinion on the market and do not provide any trading or financial advice (see Disclaimer on my site).