A triangle appears to be forming in the S&P 500, and also in the Dow Industrials. We always sit up and take notice when a triangle forms, because it almost always resolves in a major price move.

A triangle is composed of not fewer than five waves (a-b-c-d-e) which ricochet like a pinball between the upper and lower trend lines of the triangle. When the “e” wave is complete at or near a trendline, prices will bounce away from it in the direction of the next major move. As prices exit the triangle at the opposite trendline, we can measure the probable extent of the next move: it is likely to be the size of the “a” wave move.

In the S&P 500 right now, the construction of the triangle seems to be well along. The “a”, “b,” and “c” waves are complete, and the “d” wave appears to have completed yesterday at the 875.81 low. The intraday Candlestick readings yesterday displayed numerous “Hammer” and “Doji” patterns, which are bullish. Consequently, we expected that prices would very likely rise this morning as the onset of the “e” wave, and they have done precisely that.

The top of the “e” wave would probably be in the neighborhood of 960 if the wave completes today, or at about 950 if it completes tomorrow and at about 940 if it completes on Monday. Anything beyond that would mean that the triangle is getting very long in the tooth. If prices should continue in a lateral fashion beyond what we perceive as the apex, that would mean that there never was a triangle at all.

As of now, prices are taking aim at the top trend line. It is not necessary that they reach that point for the “e” wave to be complete.

If all of this observation is on the mark, after prices do reverse and head downward after the completion of the “e” wave, we would expect that the next downmove would be the size of wave “a” as measured from the point of breakdown from the bottom trendline, which gives us a target of 686.

William Kurtz
Candlewave