Wedge Issue

The S&P 500 is forming a broad wedge as we move into mid-week trade with futures indicating a lower open. While the market has been showing considerable weakness so far for 2015, it would not take much to precipitate a breakout; a move above the upper edge of this wedge formation, around 2030, would open up a potential retest of the December highs.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

A move back down towards 1992, however, could keep up the pressure on support to the point of a break. Often, multiple consecutive bounces off of a support level can have a “battering ram” effect, with a breakdown resulting after 3 or more retests. This process is exactly what happened back in early October prior to the big drop, and a repeat of those events in the next few weeks can’t be ruled out. We’ve already tested it twice, and gotten very little liftoff since.

The big event risk for the remainder of the week is the ECB rate decision, and the widely expected Euro-QE decision. How the market reacts to the announcement will have a major impact on how we position for a break from the wedge pattern on the chart above.

 

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