How To Trade S&P 500 Falling Wedge Pattern
U.S. markets ended lower last week, dragged by disappointing economic data that indicated the Federal Reserve may continue to remain on its rate hike path for some time to come. The S&P Global Purchasing Manufacturer’s index returned to expansion for the first time in eight months in February.
The core personal consumption expenditures price index, which is the central bank’s preferred measure of inflation, rose 0.6% in January and 4.7% from the prior year, above economist estimates of 4.3%. As a result, the SPDR S&P 500 ETF Trust (NYSE:SPY) closed 2.37% lower for the week.
As February comes to an end, here's a look at crucial trading ranges for SPDR S&P 500 ETF Trust: Options expiring on March 3 show the maximum open interest build-up at the 400-Call strike with 11,847 contracts at the time of writing. This indicates the level may act as stiff resistance for the week. On the downside, the 390-Put strike is witnessing the maximum open interest build-up with 67,585 contracts, indicating the level could act as strong support for the week.
Breaking out from a falling wedge
The falling wedge is a bullish chart pattern that signals a buying opportunity after a downward trend or mark correction. When the pattern occurs, it can be interpreted as a trend reversal or continuation pattern and can help traders find trading opportunities.
To identify a falling wedge pattern, the first thing you need to find is a price consolidation after a downward trend. Then, you need to identify two lower highs and two (or three) lower lows.
Taking the above into consideration, there are several steps you need to follow in order to identify and use the falling wedge pattern:
1. Identify an existing downward trend or a long bullish trend first
2. Draw two trend lines – the bottom support line and upper resistance line
3. Wait for a price consolidation and the contraction of support and resistance lines
4. Place a buying order once the falling wedge appears and the price break above the resistance trend line and/or during retest
5. Set a stop-loss order at the same resistance trend line
Took calls 20 mins after opening
Took puts at reversal and done within 45 mins
The SPDR S&P 500 (NYSE:SPY) gapped up 0.88% higher on Monday when the market ETF ran into a group of sellers who caused the SPY to fall from its high-of-day to trade up about 0.5%.
Whether or not the market will continue in its current downtrend or reverse course, remains to be seen. However, the current trend suggests the SPY is likely to trade lower, although a positive reaction to retail earnings this week could help the market turn bullish. Costco, Target and Macy's are all set to print their financial results this week.
Trading Tips: Buyers are still looking above 400 and sellers targeting 390. Looking at calls above 398.78 and puts under 397.5 on Tuesday.
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