I’ve shown the below chart several times before. It depicts the S&P 500’s performance since its March 2009 bottom. As you can see, the market has been carving out a near perfect rising bearish wedge: a rally in which the trading range becomes tighter and tighter the higher the market rallies.
This is a classic topping pattern in the sense that it typically precedes a large move to the downside. All you need is for the market to break below the pattern to the downside. And as you can see, we’re sooo close to seeing this breakdown. When you consider that this pattern is completing on rapidly dwindling volume, you have the makings of a VERY serious collapse.
It’s also interesting to note that a near identical pattern has formed from the July lows (when the latest leg up of this current rally began). Looking from this perspective, it appears the market has some additional upside to it before the pattern is broken.
However, I want to draw your attention to the absolute collapse in volume in the last few weeks. This tells us that we do indeed have the makings of a Crash here. This chart is literally screaming “no one is participating in this rally any longer” (remember 70%+ of volume is high frequency programs trading blocks of shares back and forth, NOT real buyers like you and me).
Remember, technical analysis is an art, not a science. And depending on how you slice a chart, the projections may differ. This is why I am comparing the rising bearish wedges from both the March and the July lows.
However, the fact that both charts depict a near identical pattern (with the only difference being in terms of WHEN the breakdown occurs) lends greater weight to my belief that when the formation does breakdown, the move will be severe.
Throw in the accelerated drop in volume and you’ve got a VERY, VERY ugly breakdown coming within the next month or so (I’ve said numerous times the Crash will be between September and December).
Watch the next few days closely. Stocks are showing serious signs of a major breakdown ahead.
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