Crown patterns often occur toward the end of powerful market rallies or sharp market declines, signaling a potential trend change.
A series of multiple spikes or zigzags, resembling a King crown, occurs in a relatively short timeframe before emerging from the channel. The spikes tend to correspond to Fibonacci ratios in relationship to prior swings.
A Crown pattern can develop in all markets and under various time frames. Crown patterns can be bullish or bearish. The emergence of the pattern can help astute and disciplined traders gauge the next directional trend.
However, traders should wait for the confirmation or completion of the pattern before entering into a trade.
Crown patterns are often mistaken for Head and Shoulder patterns. Unlike the more famous reversal pattern, Crown patterns typically follow a few Fibonacci-based rules.
In a bearish Crown trading setup, the short trade is initiated just below the low of the recent swing low and the stop above the recent swing high. If the market rally leads to a move above the high, the bearish Crown pattern has failed, and the trader should close the short position.
In a bullish Crown trading setup, the long trade is initiated just above the high of the recent swing high and the stop below the swing low. Below the low warns that the bullish Crown pattern has failed, and the trader should sell the position.
Price objectives or taking profits occur at major swing lows for the bearish Crown patterns and at major swing highs for the bullish Crown patterns.
The recent market action in the past seven (7) trading days, with three up days and four down days, sets up the potential for a Crown pattern or the King’s Crown formation.
Although a significant price reversal is imminent, the market remains conflicted if this is a bullish or bearish Crown pattern.
The general rules of a bullish Crown formation: (1) Price is in a downtrend via a series of lower highs and lower lows. (2) Price breaks out a downtrend and sets a new high. (3) Price retraces to pivotal resistance, typically a Fibonacci retracement of 38.2%, 50%, or 61.8%. (4) Price suddenly spikes, making higher highs and higher lows.
The general rules of a bearish Crown formation: (1) Price is in an uptrend via higher highs and higher lows. (2) Price breaks the uptrend and sets a new low. (3) Price retraces to critical support, typically a Fibonacci retracement of 38.2%, 50%, or 61.8%. (4) Price suddenly spikes, making lower highs and lower lows.
Traders should closely monitor the following levels to determine if this is a bullish or bearish Crown pattern.
Above 4,385.46-4,393.57 (Oct 2023 highs) and preferably above 4,401-4,428 (9/21/23 gap-down and the Sept 2023 downtrend) confirms a breakout and renders an SPX trading target to 4,541.25 (9/1/23 negative outside day high) and above 4,607.07 (7/27/23 reaction high).
Below 4,303.85-4,311.97 (10/13 and 10/18/23 lows) warns of a decline to 4,229 (200-day ma) and below 4,216.5-4,219.5 (Oct 2023 lows). A breakdown below 4,216.5-4,219.5 and 4,195.44 (Oct 2023 lows and May 2023 breakout) reaffirms the continuation of the Jul-present correction and downside risks to 4,048-4,049 (Apr/May 2023 lows and Jun 2023 head/shoulders top breakdown target).
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