Outlook After SPY’s Broken Wedge

by Paul Costa

The market sold off yesterday and while this came as a surprise to some, the tells that it would happen were there.  First indicator was the Wedge pattern that formed, this is a classic bearish pattern.  Then yesterday there was also the break of the 134.26 support.  Lastly, there was the Piker Indicator sell signal, which remained overbought over the last 3 days before yesterday.

The questions is where to next for the market.

Short-Term/Intermediate Outlook:   We know yesterday was a 90% down down and there could be a little rallying at this point.   Watch 133.17 if the market gets above this there will be some short-term momentum.  The market sold off 2% so there is a chance we get a rebound or a pause today.

Stepping back beyond a few hours, the case is still bearish for this market and till the bulls regain 134.26 the bearish case still wins.  SPY broke its wedge and from a TA point of view the target for this move is down to the unfilled gap at 130.  This would be a likely area for a trend reversal, but first the bears will have to break 132.0.

Other Short-term Notes:  Bonds did not rally that hard yesterday being that the market dropped 2%.  TNX has been in a tight range over the past couple of days.  The selling really was lead by the dollar rising and banks dropping.  There didn’t seem to be a flight into bonds which should occur if the market drops 2%.  This may be showing that the fear is not there anymore.  Watch to see if bonds start selling off as it may indicate a rotation into the market.

Longer Term Outlook:  Honestly who knows right, with central bank policy possible coming in anytime there anything can happen and forecasting is pretty pointless but lets look at it from a TA point.  There is a bearish descending wedge that broke, which means the bearish trend will continue.  The possible target for this move is the size of the move to get to the wedge which is about a 14% drop from the highs.  A 14% move from the break yesterday would mean SPY would finally rest around 120 this could take months to happen.  This should be taken with many grains of salt since this is a longer-term outlook.

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