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Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend

Stock-Markets / Stock Markets 2020 Nov 21, 2020 - 01:34 PM GMT

By: Chris_Vermeulen

Stock-Markets

My researchers and I want to highlight a Weekly chart pattern that is warning of a potential Top/Reversal in the SPY & SPX.  Although the current trend is Bullish and the markets are looking forward to the new year, new policies, and probably new stimulus which normally prompts some type of upward price rally in the markets, we see an “Island Setup” that has continued to form after all the positive COVID-19 vaccine news.

An Island Setup in price is when price moves or Gaps away from a typical price range or boundaries, then stalls.  This type of setup is similar in structure to a Doji Star setup in an “Evening Star” formation.  Similarly, the Doji Star pattern also warns of a possible trend reversal.  Our researchers believe any continued failure to rally at this stage points to a very real downside price reversal setting up in the SPY/SPX. Let’s take a look at some Weekly charts.


SPY ISLAND SETUP

The SPY Weekly chart below highlights the Island Price formation as well as the technical divergence in the RSI indicator (below the price chart).  What interests our researchers is the clear Island price setup outside the CYAN consolidation/FLAG formation.  Either the SPY is going to continue to rally much higher at this point or it is going to fail in this Island formation and fall back to the $320 level.  The more price fails to rally at this stage, the more likely the downside price expectation becomes.

SPX ISLAND SETUP

The following SPX Weekly Chart shows a similar pattern with the same RSI Technical Divergence.  Take note of the Double Doji Island setting up recently, and how Double Doji patterns are very indicative of market indecision and potential reversal patterns.  The most important single candle in Japanese Candlestick Theory is the Doji Candle.

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We’ve also drawn a Fibonacci Extension range on this chart and want to highlight the 125% Fibonacci Extension (in MAGENTA).  This levels appears to be very strong resistance and could become a make or break price level for the SPX in the future.

Overall, these setups continue to warn of a reversal, but as of right now we don’t have any confirmation that the bullish trend has ended.  We will warn that any future breakdown in price below this Island price formation would be a very clear indication that the bullish trend has stalled and a new downtrend may be setting up.

There is another type of Japanese Candlestick pattern that this resembles, called a Scouting Party. A Scouting Party pattern is established when price moves above resistance, or below support, in an attempt to secure new price highs or new price lows – but fails to hold these price levels over time.  This is also indicative of an attempted price trend that fails and results in a price pullback/correction.

Right now, the market price in the SPY and SPX is “scouting for new support”.  Keep your eyes on the MAGENTA Resistance levels as price continues to try to retain these new highs. If you want us to help you find and identify great trading opportunities, then please visit www.TheTechnicalTraders.com to learn about my proprietary trading systems. You can also sign up for my daily pre-market video reports that walks you through the charts of all the major asset classes every morning.

Chris Vermeulen
www.TheTechnicalTraders.com

Chris Vermeulen has been involved in the markets since 1997 and is the founder of Technical Traders Ltd. He is an internationally recognized technical analyst, trader, and is the author of the book: 7 Steps to Win With Logic

Through years of research, trading and helping individual traders around the world. He learned that many traders have great trading ideas, but they lack one thing, they struggle to execute trades in a systematic way for consistent results. Chris helps educate traders with a three-hour video course that can change your trading results for the better.

His mission is to help his clients boost their trading performance while reducing market exposure and portfolio volatility.

He is a regular speaker on HoweStreet.com, and the FinancialSurvivorNetwork radio shows. Chris was also featured on the cover of AmalgaTrader Magazine, and contributes articles to several leading financial hubs like MarketOracle.co.uk

Disclaimer: Nothing in this report should be construed as a solicitation to buy or sell any securities mentioned. Technical Traders Ltd., its owners and the author of this report are not registered broker-dealers or financial advisors. Before investing in any securities, you should consult with your financial advisor and a registered broker-dealer. Never make an investment based solely on what you read in an online or printed report, including this report, especially if the investment involves a small, thinly-traded company that isn’t well known. Technical Traders Ltd. and the author of this report has been paid by Cardiff Energy Corp. In addition, the author owns shares of Cardiff Energy Corp. and would also benefit from volume and price appreciation of its stock. The information provided here within should not be construed as a financial analysis but rather as an advertisement. The author’s views and opinions regarding the companies featured in reports are his own views and are based on information that he has researched independently and has received, which the author assumes to be reliable. Technical Traders Ltd. and the author of this report do not guarantee the accuracy, completeness, or usefulness of any content of this report, nor its fitness for any particular purpose. Lastly, the author does not guarantee that any of the companies mentioned in the reports will perform as expected, and any comparisons made to other companies may not be valid or come into effect.

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