In the hourly chart, I adjust the previous channel. Instead of a parallel upward channel, both boundaries are now closing in and form a cone shape that is tilted to the right. As the channel gets narrower, a breakout is going to happen. Ever since the S&P broke through the shoulder top resistance @ $134.69, price movement was quite choppy for day trading. But I notice the gap top @ $133.75 is holding up pretty well even with the S&P gapped down last Friday, it was still trading above the gap support, therefore I think the gap support level @ $133.75 is a good risk level. Monday morning when price gapped up in the pre-market, the gap from Friday was immediately filled and the gap play was over 2 hours into the trading hours. The Monday morning gap wasn’t hard to see its’ coming because the S&P formed a diamond pattern on Friday. Even if it wasn’t the gap that brought the S&P price back to the resistance level @ $135.54, it would have spiked up to the same price level during market hours. For the upside target, set it at the 52 weeks high @ 137.18 or you can use the upper bound of the channel because the S&P will find some resistance along that line.
At the current level, I see multiple patterns are being developed from recent price movement. Other than the diamond, I see an inverted head & shoulders pattern and a double tops pattern. However, the later 2 are contradicting each other in nature that the inverted pattern signals a possibility of upward breakout while the double tops’ breakout is signaling a break down. Regardless, one thing for sure is both patterns have a resistance level @ $135.52, either a neckline for the inverted head & shoulders or the peak level of the double tops, therefore I think it is a promising resistance level. I will map out the patterns later but you have to decide which pattern you want to believe in or neither of them.
The 15 minutes chart here is a bit messy because of the gaps, I apologize for that. Monday morning the S&P gapped up in the pre-market, tried to fill it upon open but failed, ended up testing the resistance level @ $135.52 again. Now that you see the S&P can’t fill the 3rd gap here, you can use the gap top #3 @ $135.11 as support and if price break below the level again, look for it to reach the gap bottom @ $134.4. What's more, you can also see how the light blue uptrend line started 10 days ago switched side on Friday; it was a supporting line but now it turned to resistance, use it as a reference for setting target.
Including the pre-market price action, you can see the S&P developed into an inverted head & shoulders pattern in the last 3 trading days. Since the inverted shoulder tops’ level @ $134.73 is very close to the original shoulder top resistance @ $134.69 in the hourly chart, therefore I use the later number for both patterns’ shoulder for simplicity. And I mentioned earlier, the inverted head & shoulders neckline @ $135.54; the neckline is a fine resistance considers it is only 5 cents away from the 30 days high @ $135.59. If the S&P breakout on the upside, add the vertical difference between the head and neckline to the highest point of the pattern to locate the target, which the formula is:
135.52(B) – 133.85(A) + 135.72(C) = Target @ $137.39
You should notice the target is really close to the 52 weeks high @ $137.18, if you wish to cash out earlier, you can always use the uptrend line as reference to set target since it will be a resistance to the upward move. For risk, normally I would use the inverted shoulder top level @ $134.69, however, it locates at the middle of the gap so I prefer to use the gap top support @ $135.11 from the previous chart as risk.
On the other hand, if you want to bet on the downside, here is a double tops pattern for you. You should notice the S&P tried to break the resistance @ $135.52 for 4 times, if the valleys between the 1st & 2nd peaks and 3rd & 4th peaks can go as low as the middle valley (the lowest one), I would call this a quadruple tops pattern and it would be a strong down signal. The proper way to trade this is to wait until price drops through the confirmation level @ $133.86 and the following bar opens below the level then you short sell the S&P. In this case, your target will be the next support level @ $133. However, this way you will give up all the gain from current price @ $135.21 to the confirmation level @ $133.86, which is $1.35/share potential gain. Therefore, I think getting short at current price is better because of the better risk and reward ratio. Using the resistance @ $ 135.52 as my stop, I only have $.31 cents risk and I get an extra option to cover my short at the confirmation level @ $133.86; when everyone is getting in, i will be out of the trade profitably.
I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback. By the way, happy valentine’s day.
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