Driving A Wedge

Building wedges is one of the market’s favorite pastimes. Normally, they’re fleeting events, breaking out or breaking down in short order. The S&P 500 has been building a larger one this week, clearly evident on the 3 minute chart, as its found its rising channel floor, but has been reticent to break above the 2025 level.

S&P 500, 3 minute bars

S&P 500, 3 minute bars

The lack of a fundamental catalyst to drive higher may be at issue. Its hard to make the case that there isn’t an underlying bid waiting for a reason to buy. But it needs that reason. This move has been sharp to the upside; the 2 day chart (a charting format that is growing on me for its tendency to show strong directional moves more vividly; this may justify a blog post of its own at some point) is showing a strong 7 day green candle run off the October lows.

S&P 500, 2 day bars

S&P 500, 2 day bars

Its getting harder and harder to make the case for a one way move higher. The market, nearer term, showing signs of tiring, but it is hard to argue with all the green candles. One is left with the sense that its better to give this market the benefit of the doubt until the near term trend breaks and gives you a real reason to take defensive measures.

S&P 500, daily bars

S&P 500, daily bars

At this point, the nearest downside support below the wedge we’ve been building comes in around 2016 at the lower end of the rising channel the S&P has moved up through since the inflection point on Oct. 22. A break below may simply result in a downshift of the current pace of the rally, not necessarily an all out pullback; this type of a break would be relatively innocuous on its own, and should be a healthy constructive development, barring a larger acceleration to the downside. Below that there is still the 2000 level, but its now a long way down to the 50 day, amazing considering we were sharply below the 200 day just a few short weeks ago.

The market has come a long way in a short time. Make hay while the sun shines, but be ready for a quick sunset when it comes. Good luck out there.

-Will Mogey (Twitter: @wtmogey, StockTwits: @wtmogey)

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