At the end of February this year, it seemed as if the S&P 500 index (SPX) was on the road to reaching the 2500 level.
Yet at the beginning of March, the SPX was stopped in its tracks and with the markets breaking down, the benchmark index was unable to complete its ride to a higher level.
As a result, analyst Avi Gilburt warned investors that a diagonal pattern had been created which is difficult to trade since it has characteristics of displaying volatile up and down price movements.
Added to this, Gilburt warned that as a result of price action of the SPX, it was likely that this index would not move higher than 2300 and could even decline much lower.
Interestingly, 3 months have now passed and the markets have performed exactly as indicated by Gilburt showing a clear diagonal pattern with volatile price movements.
In order to consider a diagonal pattern complete, the SPX needs to have at least one more move to higher highs. Gilburt has warned however that many traders often think that diagonal or triangle patterns are complete before they have actually ended. He also went on to say that we can probably expect the market to move in this pattern over the next 6 months, moving between the 2225 and the 2300 levels.
It is important to note that trading in a market which is attempting to complete a diagonal, is extremely risky. Based on this, Gilburt has commented that he will not trade the SPX and instead, he will cash in his long term positions after the next rally or when the S&P 500 Emini futures (ESM5, -0.01%) will break below the 2075 level.
Last week, the S&P 500 index broke below the 2123 level. According to Gilburt, this is a major pivot and the market dropped to the ‘ideal’ target he provided last week for the SPX of between 2093 and 2101. Added to this, after the market declined to the 2123 support level, it remained at this level for at least 10 minutes after the market opened for trading on Tuesday. This provided investors the opportunity to trade to the short side of Gilburt’s target. At the end of the trading day, the SPX closed at 2099.
The question now is will the SPX be able to reach Gilburt’s next target of 2154?
Gilburt says that for as long as the market stays above the 2099 level, the 2154 level is likely to be reached yet Friday’s pattern reflects the possibility that the SPX will fall below the 2075 level and might even continue to move to the 1800 region.
MT4 Chart: S&P 500
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