S&P 500 Outlook: Short-Term Technical Pattern May Set Up Rally

(MENAFN- DailyFX) S&P 500 Technical Outlook:

• S&P 500 trading on underside trend-line with RST pattern developing
• This pattern is developing on two different time-frames, may be highly significant

The stock market continues to look very weak, and while trying to find a bottom isn't an easy game there are opportunities for both sides of the market when certain signposts show up. For those who have been short from good levels potentially bullish price sequences can be viewed as a signal for when to tighten up trailing stops. For would-be longs, these signposts can offer a definable edge to use for taking a countertrend entry.

The short-term chart (hourly) is carving out an RST pattern, which is simply a 'reverse symmetrical triangle'. In reverse of a traditional contracting triangle these are marked by an expansion in price action (higher volatility vs lower volatility with a traditional triangle). The lower lows and higher highs create an expanding triangle. The logic behind why these form is simple – the increasingly larger price swings are a marker for growing indecision by the market and thus a potential turning point. They don't always indicate a reversal in trend, but because they tend to form after large price swings this is often the case.

There are a couple of ways to execute these types of patterns. One is to wait for the third low to be in and when price rises above the second low establish a position. The more conservative approach is to wait for further validation that a low is in by waiting for a rally, pullback, and rise above the rally high. The risk with the conservative approach is of course that the market just turns and burns without pulling back. Taking a 50/50 approach can help mitigate that risk.

The S&P 500 futures (ES) are currently trying to forge that third low with today's down open, and on that we could see the beginning of a low form here. What I will be watching for is first, can we rise strongly off the low above the Tuesday low, and second, can we hold onto the rally with a minor pullback and then break the pullback high.

If we can do that then the market may successfully put in a low in the short-term. Furthermore, this pattern has also been forming on the daily chart since the middle of May, with this being the third leg lower. Yesterday, the market breached that low (3807.50) on an intra-day basis, but failed to close above. A daily close above yesterday's high at 3843 would be considered a strong initiation of the RST pattern.

It would almost seem to be too good to be true, but we could get a short-term RST that kicks off a broader RST bottoming sequence. This could amount to short-term risk with a medium-term type payoff if it works out. Finding asymetrical bets is key to good trading.

Adding another layer to the bullish case based just off the charts, is that the RSTs are forming on underside slope support on the daily chart. This makes for some nice confluence, and while it may not work out the edge offered by this confluence is fairly significant. But let's first see if these RSTs can start behaving as required.

S&P 500 Chart by TradingView

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---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX

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