SPX S&P 500 2-Hour Chart; Rising Wedge; Overbot; Negative Divergence; Textbook Inverted H&S Pattern Explained; Scaling-Into a Long Position on a Breakout Explained

The SPX (S&P 500; US stock market) goes into the 3-day weekend with the bulls singing a happy tune but they do not realize they shot their load and are out of ammo in the 2-hour time frame.

Today is MLK Day. US markets are closed and will reopen tomorrow. Traders will be greeted by the neggie d on the 2-hour. Stocks are usually bullish into a 3-day weekend so that helped levitate stocks to end the week.

Tuesday is OpEx Tuesday (Keystone's moniker for this day once per month) where a low in stocks on Tuesday typically leads to a high on Wednesday. This price action usually takes place before OpEx on Friday. The BOJ rate decision and comments are key for Tuesday and Wednesday (2-day meeting). PPI is released on Wednesday morning and Housing Starts Thursday morning both may be market-moving. Keystone's housing market indicator signals a housing recession in progress currently. The new moon peaks on Saturday for the month so stocks may be soggy starting from Thursday or Friday into Monday.

Back to the chart above, that has a Christmas feel to it, the red and the green, anyhoo, the red lines show the rising wedge pattern which is bearish and the universal negative divergence across all the chart indicators. Price is out of gas to the upside in the 2-hour time frame. The RSI and stochastics are also overbot agreeable to a pullback.

A spankdown for the stock market is expected to begin the holiday-shortened week. 3950 is strong S/R. The critical 10-mth MA is at 3945-3951 so that is the line in the sand. 

If you bring up the SPX daily chart, you see that the chart indicators are long and strong in the daily timeframe. Thus, the pullback in the 2-hour time frame opens the door for a long trade that can be rode for a few days ager the negativity in the 2-hour timeframe is finished.

Of course, any negative news hitting the wires will delay the forecast for a few hours or couple days. There's a juicy gap down at 3925 so that may be what is needed during the pending retreat on the 2-hour. Thus, if you want to day or swing trade, you would want to be short now and looking for the 3910-3950 to show up in a day or two.

A long trade would be waiting for a couple days to see if she checks out the 3910-3950 area, if so, jump on and go for a ride for a few days on the long side.

Big picture, the die is cast. The S&P 500 is at 3999. The 10-mth MA is at 3945-3951. The 12-mth MA is at 4035-4040. Bulls win huge if 4040 is taken out to the upside; an upside orgy is on tap for several weeks forward. Bears win huge if 3945 is taken out because it creates shareholder pain and misery. Choose your poison.

The 2-hour chart above shows the bottom that occurred late December with the positive divergence (green lines). Price stumbled sideways due to the oddball holiday trading period and forms the inverted head and shoulders (H&S) pattern. The head is 3770 and the neckline is 3880 so that is 110 difference. Thus, if price takes out the neckline at 3880, it should run to 3990. Bingo. Old guys say bingo a lot. The inverted H&S pattern is satisfied.

For all of you budding technicians, the blue stars show the typical 3 buying areas for a breakout. Day-traders should pay close attention. For a breakout, the first star shows that the breakout should be bot. Then you wait to see how price behaves. You expect price to come back for the back kiss of the neckline so you do not want to chase price. There, you see price coming back down as would be expected and the SPX comes down for a textbook back test of the inverted H&S neckline.

When price bounces off the neckline, that is a successful back kiss (for the bulls), and successful test of the neckline which becomes firm support going forward. That is the second buy point at the blue star. Then price begins its ascent again as would be expected. A lot higher prices are now expected because of the inverted H&S pattern and chart indicators starting to squeeze out higher highs and of course the successful back kiss.

The SPX then crosses above the initial high after the breakout (blue line) and this is the third buy point for entering a long trade. If you buy one-third of the long position each time and scale-in, you reduce risk and can bail-out of the trade at anytime if price collapses. This same buying procedure can be used for any breakout in any chart time frame. In this instance, the breakout from the inverted H&S on the 2-hour chart is a gift for the day and swing traders who like to play the market in real-time.

If you are risk-averse, and afraid to step outside some days, and like to play it safer, simply wait for the final breakout at the third blue star to enter the long trade in one chunk and that will provide profits, not as much, but this long trade would be less risky (you give up the initial gains when the breakout first occurs).

So look for some sogginess in stocks to begin the week but since it is OpEx Tuesday the professional traders will be champing at the bit to buy. You will have to watch the 2-hour chart to see how things develop. Maybe down Tuesday, up Wednesday, then down Thursday, Friday, maybe into Monday, for the 2-hour chart negativity to play out, then the path higher on the daily chart reestablishes itself for rally-time on the daily basis the following week and for price to come up for higher highs on the daily basis. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

Note Added Saturday Morning, 1/21/23: The neggie d spankdown occurs on the 2-hour. Stocks drop and then Fed Governor Waller proclaims that a more dovish 25-bip hike is likely at the next meeting instead of 50 or 75 bips so it was off to the races higher and the week finishes with a buying frenzy to SPX 3973. Banks, commodities and retail stocks lead the parade higher. You can always count on the Fed, that is beholding to Wall Street and America's wealthy privileged class, to save the day. The move lower on the 2-hour chart was truncated by the happy talk that takes over the technicals since it is news out of left field, and then the charts price in the dovish chatter. The 200-day MA is 3969 so bulls are happy this key moving average is regained. The real game, however is occurring with the 10-mth MA at 3948. There may still be some softness on tap since the 2-hour was not allowed to play-out, the 10-mth will need a back kiss for a bounce or die decision, and the new moon is peaking right now for the month (the darkest outside overnight for the month). It feels like sideways slop. Watch the MACD line on the daily chart on Monday to see if it prints another higher high to indicate that there is another higher high coming for price on the daily basis. It is some funky price action to begin the new year. If you bring up the weekly, price has teased up towards testing the 50-wk MA at 4038 and this move is likely to come on the weekly basis. This sets up the ultimate decision and fate of the US stock market for 2023 when the SPX tests the 12-mth MA at 4032. The big test that is likely ahead at 4032-4038 is for all the marbles in 2023. Thus, maybe down to 3948 on Monday, then some chop but over the next couple weeks or so, say by month end, or as February begins, that epic and historic test at 4032-4038 will likely occur. The chart divergences will tell you who is going to win.

Note Added Monday Morning, 1/23/23, at 11:10 AM EST: Wow. The bulls did not waste anytime running to the 50-wk MA at 4030. The SPX is at 4030. Honey, I'm home. The 12-mth MA is at 4037 the decider of a cyclical bull market versus a cyclical bear. The 4030-4040 battlezone decides the fate of the US stock market for the year ahead. Just as the North and the South converged on the hallowed ground of Gettysburg for the epic Civil War battle, the bulls and bears converge on 4030-4040 for a battle for control of the US stock market. The HOD is 4030 with price at 4026. Price hits its head on the critical 4030-4040 resistance and is spanked back but there will be a few more tries ahead.