Dow Jones, S&P 500 Short-term Volatility Features Chart Pattern

Published date: .

US Indices Technical Outlook:

  • S&P 500 rising from support, chart pattern revealing itself
  • Dow Jones new high brings into play ‘RST’ pattern

See where our analysts see the stock market heading in the Q4 Equity Market Forecast.

S&P 500 rising from support, chart pattern revealing itself

The S&P 500 found support last week from a familiar line, the slope crossing over highs since January 2018. The powerful push off last week’s low could have the market trading in new record territory as soon as today.

The recent decline and recovery, though, potentially presents us with an interesting chart formation, as long as new highs are indeed soon notched. Going back to the 19th of last month the swings in the market have begun to become increasingly larger.

The formation of higher-highs and lower-lows is called a Reverse Symmetrical Triangle (RST), some may know it as a Megaphone. Regardless of what you call it, the increased price swings indicate an indecisive market. While these patterns are often known to indicate reversals, they can resolve in the direction of the trend as well.

One way or another the growing uncertainty gets ironed out. A fresh record high will have the required third high of the pattern in place, and from there things get interesting. If it is to have a bearish outcome, here is what to look for: For a bearish outcome price will either turn down with momentum, or it will turn down try and bottom only to fail the pullback. If the latter case, then a break below the pullback low is viewed as confirmation of a trend reversal. Also keep in mind, the development of this pattern is happening around the top of a channel in place since June, so that adds a supportive layer for a decline of sorts to develop.

For a bullish trigger, we need to see a decline from a new high quickly stall and the prior swing-high (the 3rd peak) broken. The best way to play these is to be patient, wait for the first pullback to unfold and see whether it can hold or fails. No need to predict whether this is a topping or continuation pattern.

S&P 500 Daily Chart (RST on a new high)

Dow Jones, S&P 500 Short-term Volatility Features Chart Pattern

S&P 500 Chart by TradingView

S&P 500 Hourly Chart (increased price swings indicate growing uncertainty)

S&P 500 hourly chart

S&P 500 Chart by TradingView

Dow Jones new high brings into play ‘RST’ pattern

The Dow Jones Industrial Average is of course carving out the same price sequence as the S&P 500, with it needing another push to a high before setting into motion the potential for the ‘RST’ pattern.

Dow Jones Daily Chart (RST on a new high)

Dow Jones Daily Chart, RST on a new high

Dow Jones Chart by TradingView

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To learn more about U.S. indices, check out “The Difference between Dow, Nasdaq, and S&P 500: Major Facts & Opportunities.” You can join me every Wednesday at 1030 GMT for live analysis on equity indices and commodities, and for the remaining roster of live events, check out the webinar calendar.

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---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX