The S&P 500 index has been trending lower since its peak in January 2022, but this decline could be a long correction after a massive advance. The pattern taking shape and the retracement amount is typical for corrections. Today’s article highlights this setup and shows the key level to beat going forward.
The price chart shows a massive advance into January 2022 and an extended decline for the rest of the year. The long-term trend is down with a big falling wedge taking shape. Notice that this wedge retraced around half of the prior advance. The falling wedge is typical for a corrective pattern and 50% is the base case for a retracement. Charles Dow noted that corrections retrace one to two-thirds of the prior advance with half being the base case. Think of it as two steps forward and one step backward.
There is a bullish setup on the price chart, but the trend is down until proven otherwise. In other words, I am bearish until I see evidence to the contrary. There are two items to watch. First, a move above the December high (410) would trigger a wedge breakout and a higher high. Second, watch for the Trend Composite to turn positive. This indicator aggregates signals from five trend-following indicators. It has been bearish (negative) since mid-April.
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Arthur Hill, CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London.