Important Day...

Today is an important day for the S&P. I know it is Friday and the futures look pretty flat and we had a big rebound week and it is looking like a lazy session. However, we are at a junction that may very well determine the direction of the market for the balance of October.

Open the daily line graph:



Closing price action is of course in green. I have added two sets of trendlines. The YELLOW trend lines show the rising wedge that has been in tact since the March lows. The RED trend lines suggest a possible new channel for current price action.

Payline shared a link with yesterday's post to one analysis of this formation. In a nutshell, the rising wedge is often seen in bear market rallies. In fact, Edwards and Magee suggest that most traders confuse the rising wedge for a new bull market and the mere presence of the rising wedge is itself confirmation that the primary trend remains down - and a correction/retest of lows can be expected.

Notice how the yellow trend lines rise and converge? This is the wedge. Now notice that we broke out of the wedge last week when price action failed to react at around 1048. This is a sign that the rally is losing vigor. In theory we can still rise from here, but price action will begin to roll and eventually fall more dramatically.

The red trend lines represent a new channel for price action. Notice how the trend line angles are less extreme and parallel to each other. If price action were to remain contained by this lines in coming sessions - we have a "rolling of prices" at a possible top. If price action falls through the bottom trend line of this red channel, we may get our sell-off. It seems to me that 1048 is the critical level of support.

Now let's look at the hourly chart.



Here I have included the YELLOW channel lines associated with the break from the wedge. As you can see, the last reaction in the downtrend broke the top trend line and has tested the prior reaction high. In doing so a new channel has been formed during the reaction and is bounded by the RED trend lines. If price action follows this channel higher we will get a test of the 1080 intraday high. If we close above 1072, we will have re-entered the wedge on the daily. If price action breaks down and out from the bottom trend line, we may reach back into our down channel below 1048 through 1061, and 1056-54.

At first glance on the hourly that may not seem so significant. I mean, 1048? That price level is still at high end of the down channel. Don't we have to get down to test the last local low at 1024? The answer is no, 1048 is much more signficant, for now.

Yes, 1048 gets us back into the down channel - but it also breaks the lower trend line of the up channel seen on the daily. This is very, very important. Remember, the up channel on the daily represents a "rolling" of prices at the top. If we are able to break out of its lower trend line, the correction will accelerate. These are all levels that trading programs will react to. This could trigger a major selling wave.

Anyway, I hope this makes sense to folks.

Good luck today.