S&P 500 Breaks Out of Pennant Formation – More Selling to Come?

The S&P 500 (

) broke out of its recent pennant formation on Thursday, plunging 20.78 points (1.7%) to 1,216.12. Pennants are classified as “continuation patterns,” which may signal that market has some rough times ahead of it.

The S&P 500 is one of the most widely followed indexes in the world, and its underlying ETF, the SPDR S&P 500

is, consequently, one of the most heavily traded investment vehicles. Any developing patterns regarding the two are highly significant, as analysts and market participants are constantly trying to gauge the index's/ETF's future direction – both in the short- and long-term. As the 6-month daily chart (click to enlarge) at the bottom of the article shows (SPY chart), the pennant pattern, which was broken in yesterday's session, began with the pole ranging from the S&P's October 4th low of 1,074.77 ($107.43 for the SPY) to the October 27th high of 1,292.66 ($129.42 for the SPY) - a 20.5% rally from low to high. After hitting that October 27th high, however, the S&P 500 found itself caught in an ever-tightening consolidation pattern as bulls and bears dug into their positions. Bears seemingly won the battle however, as the S&P sliced below its support trend line, sending longs rushing to the exits in the process. The fact that the move occurred on relatively high volume indicates that move is, indeed, valid – obviously not great news for investors.

Unfortunately for bulls, yesterday's move broke below two levels of support – the ascending trendline at 1,235 ($124 – SPY) and support at 1,215.42 ($121.52 – SPY). The next area of support lies at 1,191 ($119.12 – SPY). Beyond that level, no support comes into play until the 52-week low at 1,074.77 ($107.43 SPY) – 11.6% lower than the current value/price.

As always, every good trader needs to be prepared in case of an unexpected reversal, as such moves have the capability to earn, and/or cost a lot of money. The key is to map out the levels that let you know when your trade is right, and when it is wrong. In this case, the level to watch for the S&P 500 is 1,250 ($125 – SPY). Should bulls manage to push the S&P back to these levels (middle of the pennant), it could signal a run toward resistance at 1,266 ($127.45 SPY). After that, the immediate resistance levels to watch are 1,277.55 ($128 – SPY) and 1,292.66 ($129.42 – SPY).

This break of the pattern is significant, as bears and bulls had been fiercely battling over control of the S&P 500 for the past 15 sessions. Shorts won and will no doubt try to continue the move to the 52-week lows experienced in the beginning of October. Whether or not bulls can regain control and keep the S&P from falling further is anyone's guess. Unfortunately, for them, there are numerous resistance levels to break between 1,266 and 1,292. Time will tell.