Wednesday, May 25th, 2016, was a big trend day for the S&P 500 following the breakout from a bullish flag a day before. Week before, on Thursday May 19th, the index had made a bullish hammer. Then it consolidated for couple of days. Then on Tuesday May 24th, it formed a large upside range day followed by a breakout the next day. So naturally the odds were higher for the market to hit the pause button and we noted that. On Thursday May 26th, the market did take a breather.
After Wednesday’s NYSE close, markets overnight around the world were upbeat. Thursday morning saw S&P 500 futures to be in positive territory. However, the emerging chart patterns were hinting that the day’s action may not be that of the day before. Usually, after back-to-back large gain days, the market waits for some catalyst during the early morning trading to set the tone for the rest of day.
Nothing of that sort happened during the first hour as the 6-minute chart of e-mini S&P futures tell us. The NYSE session open saw futures to be forming a smaller rectangular trading box within a bigger rectangular trading box. Immediately after the open, price tried to break above the resistance but failed. So it tried to test the support. It succeeded in breaking the lower bound within first 15-minutes of trading. Its attempt to break the lower bound of larger rectangle failed by 10:00 AM. Price then tried to bounce but got stopped at the prior support turned resistance.
After that first-hour of action the S&P just meandered along till 1:00 PM bouncing up and down within the newly created smaller rectangular trading box in the lower half of the bigger box. The afternoon trading had a bit more direction, though not much momentum. Beginning 1:00 PM, the price made a sustained effort to rise and then made higher highs and higher lows to end the NYSE session almost where it started.
The daily chart of S&P 500 index shows that follow through from the breakout above a bullish flag, a Harami-Doji candlestick formation. Harami is a candlestick whose open and close, i.e. the body of candlestick, are completely contained within the open and close of previous candlestick. A Doji is candlestick which opens or closes at the same level or very close. On their own, both of these pattern indicate indecision. Together their impact is more.
I we dig further, then we find that another chart pattern emerging.
The 30-minute chart of eMini S&P futures show a Symmetrical Triangle emerging at the top. A Symmetrical Triangle could be either a reversal pattern or a continuation pattern. Usually, it does not give any indication during its formation, which way it evolve. Only the context and move preceding it could give us a clue.
More often then not, a symmetrical triangle turns out to be a continuation pattern. Odds are higher that the current emerging pattern will also be continuation. The reasons supporting this hypothesis include the length of the move, which is very short, which generally favor continuation. It has just broken out of a bullish flag, which occurred within a uptrend that started February ’16 lows. Usually, a flag usually happens at the middle of a strong move, which means that the uptrend has more room to run up.
The factors against the continuation include existence of many strong resistance levels above, Federal Reserve’s determination to raise interest rates and growth concerns of Chinese economy.
Adding to the uncertainty is the first quarter preliminary GDP numbers, which will be released on Friday, May 27th.. Also, Fed Chair Janet Yellen is scheduled to give a speech on Friday.