The Sp500 continues to currently trade within an inverted triangle or a broadening wedge formation. This type of pattern has been very common in recent years and you are likely to see many more or them on many different markets. They paint a picture of indecision and confusion and can be very difficult identify early in their formation and are clearly frustrating for both bulls and bears.
To be honest I hate this pattern because it is so confusing. Credit for the identification of this pattern goes to a comment poster here named Shrihas. Shrihas pointed out this pattern to me on 7/1/2010 and 7/2/2010 and at the time I was extremely bearish and because of my excessive bearishness I recognized the point he was making but to be honest I did not want to believe it because of my bias.
The action of 7/6/2010 and 7/7/2010 however completely turned me around into a bullish stance because of the new bullish divergence being created along with the inverted triangle.
The mentioned in a previous post that we would likely need to see the market stage a rapid advance in order to overcome the downward forces of the bearish 50/200 moving average bearish cross. Relative to the action of the previous two months, price needs to get in a situation (on a closing basis) where it moves higher at a pretty good rate to help rapidly shift the moving averages around topside again. It does not mean that we have to trade upwards in a straight line but the sooner we can reach higher levels (above the 50 day and 200 day moving average) the better.
I suspect that August will be the month that contains a good portion of the retracement of the recent rally. That would actually work out well in terms of the bullish scenario since August is likely to be a low volume month.
The chart shows that this rally could find a stopping point between 1140 and 1180 (the top of the broadening wedge –inverted triangle) depending on which line you prefer (blue green or red). The red line is the most conservative stopping point.
From there the market is likely to start a retracement leg.
The doji we say yesterday in the market could be a half way point of this recent move and would fit in nicely with a move to 1140. The 6/21/2010 swing high is also an important market testing point. That value is 1131.23. There will probably be some sort of doji or reversal day at that level as it represents an important level where many got trapped. It will also be useful to see what kind of volume that swing high is tested with.
If there is one lesson from the chart above it is simply that channel lines are very important to pay attention to these days because the markets have this tendency to trade in these weird patterns. On June 7, 2010 I suppose one could have constructed the bottom portion of this inverted triangle and maybe also the top portion as well. It would have been early but it would have been a very useful tool in determining upcoming extreme points and reversal levels.
By the way my weekly charts of the sp500 are showing confirmed weekly trend changes based on the weekly MACD historgram. Of course this week is not fully over yet but if we close higher than where we did today then this still be a weekly confirmed trend change to the up direction.