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Bearish Wedge Pattern on S&P 500?

I have only just begun to study technical analysis, but take a look at my first chart below using SPY, the S&P 500 ETF. Since the low on March 17th, SPY established an uptrend channel (black lines.) However, that channel has now degenerated into a “rising wedge” (red lines). Wedges are considered to be bearish patterns (keep reading below.)

According to the textbook, Technical Analysis of Stock Trends, rising wedges:

  • Normally take more than 3 weeks to complete
  • Feature falling volume (see bottom chart)
  • Show a gradual loss of investor interest
  • Usually collapse quickly down to the beginning of the wedge
  • Are found almost exclusively in bear markets

This rally is failing to bring in new recruits. If volume stays weak, this wedge seems like a pretty good candidate to trigger the next leg down in this bear market.

This entry was posted on Tuesday, May 6th, 2008 at 5:39 pm and is filed under Investing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

4 Responses to “Bearish Wedge Pattern on S&P 500?”

  1. Josef Baumann Says:
    May 7th, 2008 at 6:50 am

    Hi Matt,

    Thanks for your great blog!

    I am also a novice to technical analysis.

    I find that StockCharts offers excellent explanantions. For rising wedge look at:

    http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:rising_wedge_reversa

    It appears to me that divergence in PPO is needed for a rising wedge. That is not the case in the current market situation.

    Best regards,

    Josef

  2. admin Says:
    May 7th, 2008 at 7:37 am

    Josef,

    Thanks for the link. Stock Charts has an excellent treatment.

    Yes, I agree. The price action on the S&P 500 is strong right now and I wouldn’t short it here. I am watching for the wedge to develop further. Friday’s opening gap pushed the top line of the wedge higher, so the pattern has weakened.

    Matt

  3. admin Says:
    May 7th, 2008 at 3:33 pm

    Well, it looks like I was wrong to doubt my rising-wedge now that the S&P fell 1.8% today. I was looking for some kind of double-peak to form. Maybe the market can rally back to make that second peak, but it might be time to stick the fork in.

  4. Matt Trivisonno’s Blog » Blog Archive » Barron’s Picks-Up On My “Rising Wedge” Says:
    June 1st, 2008 at 3:34 pm

    [...] wedge” pattern on the S&P 500 chart made it into Barron’s today. But you saw it here first almost a month ago! Bookmark It Hide [...]

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