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Downside Wedge Breakout in S&P 500


After failing to make significant progress to the upside in recent months, the S&P 500 E-mini (September contract) has broken below a wedge formation which has been building for most of 2015. A wedge, in this case, is also called an ending diagonal. The pattern shows buying is slowing as the price action converges while still creating slightly higher highs.

Throughout the multi-year S&P 500 rally the bears have been burned multiple times on false breakouts to the downside. If the break lower is legitimate, then the price is likely to fall, erasing all gains seen since early February; target 1975 to 1960.  Another target, based on the height of the wedge, subtracted from the breakout price, is 1944.

Figure 1.  September E-Mini S&P 500 Futures Contract (ES) - Daily Chart

This bull market has been resilient though. While price has broken below a wedge pattern, the price action still shows higher swing highs and higher swing lows. Trading the wedge breakout lower is a bet against the dominant trend. An alternative way to trade the wedge breakout is to wait for more downside confirmation, but still get a good entry price if the situation develops. To do that, wait for the price to drop below 2050 (the May swing low), then wait for the price to pullback higher. If the pullback (higher) stays below 2126.25 and starts to drop again, the price action has shown that sellers could be back in control.

Disregarding the wedge, if the price pauses above 2050 (creating a higher swing low) and then begins to move higher, the long-term uptrend remains in play and presents a buying opportunity for the next rally. Target just above 2126.

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