The Rising Wedge and the SP500.

On Friday I implied that the US equity Bulls needed to hold the current 'Rising Wedge' pattern from breaking down in order to avoid a very ugly set-up for US equities. As it happened the bulls did pretty damn well given the negative data and strong sell-off which appeared to be taking hold in the wake of that data. However, I have decided to have a look again at the 'Rising Wedge' pattern, to see whether my initial prognosis that a break down would see the market turn ugly, was a valid call.

If you would prefer not to read all the waffle which follows. A quick summary is that this 'Rising Wedge' is just as likely (possibly even more so) to break to the upside, either directly or perhaps after a false break lower, as to the downside. Which slightly contradicts my assertion on Friday.  - Further, which ever side breaks, this is probably going to be the direction to go with (though watch for the false break).  - I have gone into more detail below, and added my conclusion to some prior analysis of the SP500.

Added after original posting. - There is quite clear divergence on the momentum studies intraday, this may continue to work against a short-term upward move, however continued sideways consolidation, or a correction (which may be a false break), could work this off nicely.
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A look back over the daily SP500 since 1965 shows 19 prior 'Rising Wedge' patterns, most of these have been in the period since 1990. I have classified those 'Rising Wedge' patterns into three broad types.

On the face of it, the current 'Rising Wedge' pattern would appear to be the of the first type above, 'A corrective 'Rising Wedge' within a downtrend'; there have been seven 'Rising Wedge' patterns of this type, six of which broke lower, and one which broke up higher. - However, it is arguable whether we are in a downtrend,  in all the seven prior examples of this type of rising wedge, the prior uptrend had ceased at least six months previous, and in most cases a downtrend was well established. Currently we are just 3 months from the end of the previous uptrend, and it is no way clear we are in a down-trend. - Furthermore, if this is the case, the pattern over recent months looks very similar to the set-up around the one example where this type of 'Rising Wedge' broke up, which occurred in March 2009. [This can be seen in the chart below].  And, just to add a further level of confusion, that 'Rising Wedge' initially made a false break lower.

   (Click on chart to enlarge.)

However, I digress slightly, if this is not the first type of 'Rising Wedge' pattern, then it would appear to be the second type, ' A Rising Wedge following either a correction lower within an uptrend, or a consolidation phase. This adds to the confusion, since breakouts from this type of wedge do not appear to display a typical behaviour. Of the nine examples I have found of this type, four broke higher (one of them after a false break lower), three broke lower, and two had erratic break outs leading to further consolidation.

The conclusion from all this is that perhaps the 'Bearish' potential of this current 'Rising-Wedge' is not as clear as I first thought. Sure a clear breakout should favour a continued move in which ever direction it occurs (though false breaks do occur), however it would appear that a until breakout occurs, this 'Rising Wedge' may have as much Bullish potential as Bearish Potential.


I can apply the above to previous analysis of the SP500, in particular analysis of the larger recent 'Falling Wedge' pattern, which I carried out last week, which can be seen by clicking here.  - At the time I concluded that the set-up fitted a type of 'Falling Wedge' pattern which favoured further upside, although I did caution that it was not totally clear, and that it could also be labeled alternatively as a type of set-up which had a potentially more bearish outcome.  -  To add further, my own long-term directional bias system, which I referenced here, has failed to generate a bearish signal on the recent down-move and retains a Bullish Bias for now, though this is a lagging not a forward looking indicator. Finally, and to the contrary, in my head I still have a bearish fundamental bias. Though I prefer not to let my fundamental thoughts override my analysis, I always pay some attention to this. -  In summary, I believe the odds favour an upside resolution, but the picture is confusing and lacks clarity right now, and it would not take much to shift to a bearish stance.