Stocks are storing up energy for another big move.
For the past two weeks, the S&P 500 has been confined to a tight trading range between 1,332 on the upside and 1,305 on the downside. The lack of activity has frustrated both bulls and bears, and has coaxed some of the best traders I know off their trading desks and onto the golf course.
"Why should I waste time staring at my quote screen," my friend Jim asked me, "when I get more action out of my 3-wood?"
By the look of the following chart, however, Jim might want to put his clubs back in the bag. The S&P is nearing an inflection point. And when it breaks, it's going to break big.
Take a look...
This is a short-term chart of the S&P 500. The blue lines on the chart highlight a "consolidating triangle" pattern. This pattern develops as the index bounces back and forth between higher lows and lower highs. The support and resistance lines merge closer together and form a triangle. Eventually, the index has to break out of the triangle, which often leads to a large move.
How large?
The move is usually equal to the height of the triangle itself. In this case, the bottom of the triangle is at 1,295, and the top is 1,345… That's 50 points. When the S&P finally breaks above resistance or below support, we can expect a 50-point move. In other words, we're looking at the potential for the S&P 500 to run as high as 1,375 on the upside, or drop as low as 1,260 on the downside.
That should be more than enough action to keep Jim off the golf course.
Keep an eye on this chart. Pay attention to the direction in which it breaks. It will lead to a huge short-term move.
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