The S&P 500 SPDR (SPY) hit a new high in July and then moved into a trading range the last few months. Momentum turned down during this trading range and this is perfectly normal during a consolidation. Today will look at a weekly chart pattern taking shape and show by we need to look at both sides of the momentum coin.
The current consolidation in SPY is a consolidation within an uptrend and you know what I am going to say next. A consolidation after an advance is a bullish continuation pattern. Sure, not all bullish consolidations resolve higher, but the odds favor a bullish resolution when the bigger trend is up. Moreover, with a higher low from August to October and equal highs in July and September, this consolidation looks like a classic Ascending Triangle, which is a bullish continuation pattern.
The indicator window shows the weekly PPO(4,40,0) to measure momentum. One side of the coin shows waning upside momentum, while the other shows upside momentum outpacing downside momentum. Momentum is clearly slowing, but less upside momentum is not outright bearish, especially when it comes after a new high. Momentum indicators flatten or even decline during consolidation phases because prices are moving sideways. Duh! The indicator window shows the PPO failing to exceed its April high this summer and forming a lower high in September. Yes, upside momentum is slowing. However, the PPO is still positive and this means there is more upside momentum than downside momentum. Again, look at both sides of the coin.
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Arthur Hill, CMT
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