I wrote last time I composed some musings for this space, about the rectangle
pattern that had developed in the S&P and to some degree in the (Nasdaq) Composite. This has been ongoing, so I'll go back to this concept for another bite of the apple.
I write again about the chart pattern traced out that is a possible RECTANGLE TOP. A rectangle top is where prices trend up to a box like formation and oscillate between two horizontal trendlines before EITHER breaking out upward OR breaking out downward.
The key determinant of why you assume that a rectangle pattern IS a TOP is simply taking the DIRECTION of the trend BEFORE the rectangle formed. If the trend was up as it has been since the early-March low, I first assume a top. However, that's just an assumption as only slightly more than HALF of these box patterns that form after an extended RISE turn out to be tops. Still you can make money with a more than half outcome.
A measuring implication for a breakout either ABOVE or BELOW the rectangle is valid in either direction typically. So, while I'll start with an assumption that the pattern highlighted in my first chart is a rectangle TOP, I mostly want to think about how far a next trading swing will carry if prices pierce EITHER the top or bottom of a rectangle.
There was the oscillation between an area of highs around 950 and a area of lows around 880 that form the lower and upper lines of a rectangular pattern highlighted in yellow on the SPX chart.
The measuring implication for either an upward or downward breakout, is for a 'minimum' price objective equal to the price distance between the upper or lower horizontal lines added or subtracted to the breakout or breakdown point. In the case of the upward breakout, a minimum move projection is an amount ADDED to the upper line or ... SUBSTRACTED from the lower line in the case of a downside breakout.
'Upside' and 'downside' objectives are noted on the SPX daily chart below. A breakout UPSIDE move comes out to the 1020 area at a minimum. There's no maximum so to speak. The downside price swing target is back to the 800 area, which could happen and still be a 'normal' pullback in terms of the long-term weekly charts.
You can also see on the chart above the succession of overbought RSI extremes that occurred prior to and during a move back to a prior important SPX high around 944 and a possible double top.
I can't assume anything about a move outside the 'box' here or not yet. WHEN there is a decisive downside penetration of 879 OR a decisive upside penetration of 950, the top end of the rectangle above, traders with option strategies profitable on SPX remaining within a defined range, should consider exiting. The evidence for changing a trading strategy also depends on what works for YOU over time.
An example of a minimum swing objective following an UPSIDE breakout above the top end of a rectangle (assumed to be a top), is seen in the mid-April to late-May sideways pattern traced out by the Nasdaq Composite below. That period is highlighted by the rectangle (marking) 'tool' in my TradeStation software.
If my pet theory is correct the next move on a breakout above 1775 which occurred in late-May would likely equal a move equal to the prior high around 1775 and the ('box') lows around 1675. This difference ADDED to the top end of the rectangle comes out to 1875 as a 'minimum' upside objective. COMP of course ran to 1880.
Today COMP is again under pressure after failing to surmount resistance implied by the previously broken up trendline per where the red down arrow is now. The colorful name a mentor of mine gives to this kind of resistance trendline is "the 'Kiss of Death' trendline". It always seemed like a colorful and mostly true description.
Going back to the S&P index, this time to the big cap S&P 100 (OEX) and to thinking 'outside the box' in terms of projecting a minimum next move for either an upside breakout ABOVE 440 OR for a downside break BELOW 412. These targets are noted on the OEX daily chart below.
The values where I've set my lower and upper lines are based on the 2-3 or more lowest lows or highest highs during the period we're looking at in this case also the period we're in now.
The 'line' values are somewhat arbitrary but mostly make sense the longer you see chart patterns like this. It happens that rectangle top and bottom patterns are ones that are reliable enough in their projected outcomes that you can make money (or lose LESS) by taking note of the more obvious such patterns that show up and the price swing possibilities they point to.
However assume nothing and I try to have no carved in stone opinion on directional moves until enough buying or selling causes a next breakout, UP or DOWN, in a rectangle pattern when seen in the index or stock in question.
Trader sentiment is falling given the inability of prices to break out of the (price) 'box' that it's in. Not surprising that it doesn't in the summer market doldrums. I'm still anticipating the ultimate breakout will (again) be to the upside, especially if options traders continue to get more defensive and especially more bearish and that line (above) has been falling on balance.
A side note is that my particular 'sentiment' indicator works more like many other 'oscillator' type indicators in that high bullishness is on the LOW end of the scale and more bearish, on the HIGH end of the scale.
And of course more bearish 'is' (becomes) more bullish
And more bullish 'is' (becomes) more bearish.
So said Alice and so does also the theory of CONTRARY opinion.
GOOD TRADING SUCCESS!