SPX Ascending Triangle and Cup and Handle Patterns?
Ascending Triangle and Cup and Handle patterns are bullish continuation patterns that suggest a consolidation phase before the resumption of the primary uptrend. In the case of an ascending triangle, characterized by a rising lower trendline and a flat or horizontal upper trendline that acts as resistance. A cup and handle pattern resembles a cup-like shape like the letter “U” and the handle, which resembles a minor downtrend.
Since the cup and handle pattern is the larger of the two continuation patterns, we will focus more on this formation. A cup and handle pattern can be as short as several weeks to as long as 1-year or more. A classic U-shape increases the odds of a legitimate formation. Volume should dry up near the bottom of the cup, suggesting selling exhaustion or sellers have lost interest in selling.
As the stock emerges from the bottom of the cup, it usually meets resistance, prompting a smaller pattern to develop, aka the handle. Typically, the correction within the handle should not be more than 20% to 30% from the base’s left-side high. The second rally to the top of the cup results in a breakout of the handle with increased volume, confirming the resumption of the primary uptrend as traders jump on board the bullish trend.
A cup and handle pattern typically has a high success rate if the general market undergoes consolidation within a primary bull trend. The accuracy rate for the completion of cup and handle patterns is around 65-68%. However, a cup and handle pattern tends to have a poor track record when the general market is correcting within a primary downtrend. As a general guideline, a classic cup and handle pattern price projection is based on the distance from the right top of the cup/handle to the bottom of the cup and adding the number to the breakout.
Since Sept 2022, a large cup and handle continuation pattern has developed in the S&P 500 Index (SPX). The top of the cup is the horizontal line at 4,119.28, 4,100.51, and 4,100.96, or the Sept and Dec 2022 highs, representing pivotal resistance. A convincing breakout above 4,100.51-4,119.28 completes the continuation pattern and suggests 627.70 points for an SPX target at 4,746.98 or near the Nov 2022 high (4,743.83).
Since Nov 2022, a medium-sized ascending triangle has also developed. A breakout above 4,100.51-4,100.96 (Dec 2022 highs) confirms the consolidation pattern and suggests 336.47 points or a target at 4,437.43 or just above the 61.8% retracement from Jan-Oct 2022 decline (4,312) and the critical Aug 2022 reaction high (4,325.28).
Since Feb 2023, a small technical base has developed between 4,060.79 (2/10/23 low) and 4,195.44 (2/2/23 high). Above 4,195.44 confirms a near-term breakout and suggests 134.65 points or a target at 4,330.20 (Aug 2022 reaction and 61.8% retracement from Jan-Oct 2022 decline).
Initial trading support rises to 4,060.79, or the 2/10/23 low. Below warns at a decline toward 4,019 (extension of the Jan 2022 downtrend breakout, not shown) and critical secondary support at 3,944-3,973 (Oct 2022 uptrend, 50-day ma, and 200-day ma). A breakdown renders a retest of medium-term support at 3,744-3,792 (late-Nov and Dec 2022 lows and trendline). Intermediate-term support remains at 3,584-3,491.58 (Sept and Oct 2022 reaction lows).
A word of caution, although the Oct 2022 rally has been impressive, the past four (4) oversold rallies have faded after generating constructive technical bases (i.e., cup and handle, ascending triangle, etc.). Nonetheless, the differences between the current bases and the previous patterns coincide with the two daily moving averages (50-day and 200-day ma) showing flat-to-rising trends, a bullish golden cross buy signal and completion of a primary downtrend breakout. Pullbacks remain one of the keys to solidifying the Oct 2022 bottom and the resumption of the long-term uptrend.