None of the major U.S. stock market indexes — S&P 500, Dow Jones Industrial Average, Nasdaq, Russell 2000 — made any real progress for most of February.
Such sideways churning tends to muddy the water, but that’s not what happened this time. Quite to the contrary, a pattern emerged that suggested a “pop and drop” sequence. How so?
On Feb. 27, I noticed that the S&P 500 SPX, -0.79% was forming a triangle pattern (see purple lines in chart below, first published in the Feb. 27 Profit Radar Report).
Triangles can be found in classical technical analysis (TA) and Elliott Wave theory (EWT). Triangles form as price action coils and constricts (lower highs, higher lows) within narrowing triangle boundaries. Once triangle support or resistance is broken, price snaps out of its range.
Based on classical TA, the measured target of a triangle breakout is around 2,845 points in the S&P 500.
Elliott Wave theory provides additional clues and implications. Triangles usually occur in the wave 4 position. The chart below illustrates an idealized EWT sequence of 5 waves up, followed by 3 waves down.
The purple circle highlights the wave 4 position, and the purple arrow the ideal post-triangle trajectory (in short: pop and drop). The minimum requirement for wave 5 is a new high.
As seen in the chart below, the S&P 500 popped to a new high (fulfilling the minimum upside target according to EWT) and dropped 48 points thereafter.
It looks like the S&P 500 will go lower, but if (and as long as) the S&P 500 remains above support at 2,764 points, there is one alternative option (discussed here).
Based on Elliott Wave theory, the downside target for the next leg lower is around 2,720 points, but it could be much lower.
Why the downside target could be even lower is discussed here.
Simon Maierhofer is the founder of iSPYETF and publisher of the Profit Radar Report.
