As­cend­ing tri­an­gle pat­tern sug­gests fur­ther gains in the medium term are likely

As­cend­ing tri­an­gle pat­tern sug­gests fur­ther gains in the medium term are likely

Financial Mail - Investors Monthly - - Contents -

De­spite con­cerns about a slow­ing US econ­omy, the S&P 500 has re­cently bro­ken to a new all-time high and looks poised to con­tinue higher in the months ahead.

This break­out was not un­ex­pected. The price of the index had been form­ing higher lows through­out the year and the se­ries of prior highs at 3,025 formed the up­per bound­ary of an as­cend­ing tri­an­gle pat­tern. An as­cend­ing tri­an­gle pat­tern is usu­ally a bullish con­tin­u­a­tion pat­tern within a ris­ing trend and they usu­ally break to the up­side. The pat­tern here is a text­book as­cend­ing tri­an­gle pat­tern. There are five clear “waves” within the pat­tern and the break­out has oc­curred on the fifth wave.

Thus the break above 3,025 is bullish and opens the po­ten­tial for fur­ther gains in the medium term to al­low the bull mar­ket to make fur­ther strides into blue-sky ter­ri­tory.

The mea­sure­ment of a tar­get for an as­cend­ing tri­an­gle pat­tern is cal­cu­lated by tak­ing the price dis­tance at the broad­est point of the tri­an­gle and pro­ject­ing it up­wards from where the break­out oc­curs. In this case, the broad­est point was in July and mea­sured about 200 points. Thus, add the 200-point mea­sure­ment to the break­out level at 3,025, to give a tar­get mea­sure­ment of 3,225.

It’s un­likely that the mar­ket will go straight to the tar­get in a straight line. Usu­ally a break­out of this na­ture will pull back and re-test the break­out level be­fore mov­ing higher again. So tech­ni­cal traders will now be look­ing for a re­trace­ment to 3,025 to re-test the sup­port (pre­vi­ously re­sis­tance) and to then buy on that first pull­back.

If the price holds the 3,025 area and bounces off that level on the next mi­nor pull­back, that will be an en­cour­ag­ing devel­op­ment for the price to move higher in the medium term and tar­get the 3,225 level.

There is an as­sump­tion that the northern hemi­sphere sum­mer months typ­i­cally see the stock mar­ket per­form worse than in win­ter. That is where the say­ing “Sell in May and go away. Come back on St Leger Day” comes from.

It harks back to a cus­tom of Lon­don-based aris­to­crats, mer­chants and bankers who went to the coun­try to es­cape the heat of the city. St Leger Day is a horse race that takes place at the end of sum­mer.

An­a­lysts at Real­In­vest­ment Ad­ put the the­ory to the test. They as­sumed a start­ing value of $10,000 in­vested in the S&P 500 from Novem­ber to April, or just in­vested from May to Oc­to­ber. The data sam­pled goes back 60 years. The find­ings were re­mark­able.

The Novem­ber to April pe­riod (win­ter in the northern hemi­sphere) ex­hib­ited a mas­sive out­per­for­mance over the funds in­vested be­tween May and Oc­to­ber. The chart plots the dif­fer­ence. The $10,000 in­vested for 60 years be­tween Novem­ber and April grew to around $275,000, whereas the same amount in­vested be­tween May and Oc­to­ber achieved just 10% of the growth of the money in­vested through win­ter.

The his­tor­i­cal ev­i­dence is com­pelling. Given that the S&P 500 has re­cently made a bullish break­out, it looks as if a sea­son­ally strong pe­riod for the S&P 500 is get­ting un­der way and fur­ther medium-term strength is likely. ●

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