Search

A Descending Broadening Wedge?

Investors and traders are behaving like children. Who must be bribed with sweets such as a lollipop (i.e., QE or less QT) to calm them?

The sugar-starved/liquidity-driven children/investors, when offered lollipops (QE or less QT), are delighted. By taking away the lollipops, they revert to screaming and yelling.

Earlier last week, the lollipop came in the form of less-bad news on the economy (i.e., ISM Manufacturing index) and corporate earnings. However, in the second half of the week, the sweets were taken away soon after the unemployment numbers and the labor-force participation rate.

With Halloween a few weeks away, will stock receive a treat or a trick?

Despite the persistent selling in the stock market this year, there are descending broadening wedge patterns developing in popular indexes, including the S&P 500 Index (SPX).

A descending broadening wedge tends to be a bullish chart pattern. Typically, a reversal or a continuation formation occurs with two broadening and diverging lines. The upper line is a downtrend of lower highs, and the lower line is lower-lows. It is the opposite of a bearish ascending broadening wedge or the dreaded megaphone top pattern.

A descending broadening wedge does not indicate an exhaustion of the current selling trend. The diverging lines within a downtrend suggest a loss of momentum on each subsequent downturn.

A descending broadening wedge often forms after a trough or after a peak. Under the former scenario, this type of pattern conveys the potential for a bullish trend reversal. Under the latter, it signals a correction within a bullish longer-term trend or a bullish continuation pattern.

It is unclear whether the current 10-month descending broadening wedge pattern in the SPX Index is coming after a market peak (4,818.62 – 1/4/22) or from an impending trough (3,231 – bottom of the descending broadening wedge pattern). Time will tell.

Suppose the SPX Index descending broadening wedge appears after a trough. In that case, it is typically a bullish reversal pattern. The top of the formation (4,818.62) is the price objective on a convincing breakout above 4,231-4,325 (top of broadening wedge and 8/16/22 high).

Suppose the SPX Index descending broadening wedge appears after a peak. In that case, the pattern signals a correction within a bullish longer-term trend or a bullish continuation pattern. A convincing breakout above the top of the broadening wedge at 4,231-4,325 confirms the resumption of the bullish trend. The price objection is the maximum height of the pattern (4,818.62-3,213=1,587.62) added to the breakout (4,231) or SPX target at 5,818.62.

If the descending broadening wedge pattern is valid, then the implication is quite bullish for US stocks. The caveat remains the current stock market decline is a cyclical bear decline and not the start of a structural sideways trading range or structural bear trend.

The two potential SPX projections of 4,818.62 and 5,818.62 differs by 1,000 points depending on a market through or peak.


It sounds overly simple when you think about it - if fewer sellers are remaining and buyers return, then this indicates a price bottom.

Is the next low of the descending broadening wedge pattern (i.e., SPX at 3,231) a potential market bottom?


Does this lead to a trend reversal above 4,231-4,325 and the continuation of the structural bull trend?


Source: Chart courtesy of StockCharts.com

65 views0 comments

Recent Posts

See All

Technical Summary Equities – SPX nears pivotal intermediate-term resistance at 4,105-4,219 or the top of the Jan/Mar 2022 downtrends, Jun, and Sept 2022 highs, the 50% retracement from the Jan-Oct 202