By Chris Vermeulen via Iris.xyz
As we continue to scan the charts for setups and triggers about which to alert our followers, we’ve come across one that may be more ominous than it appears. Recently we’ve posted articles about how the S&P and Nasdaq have pushed into new all-time high price territory and how Gold is setting up for a momentum base that should launch precious metals to near highs. We’ve also discussed how we believe the current upside price bias in the US stock markets should last another 10-35 days before new price weakness sets up – possibly pushing prices lower in late May or early June 2019.
Our research team has been scanning the charts looking for anything that could give us an edge to the potential setup for this price weakness in the future. We believe the Transportation Index and the Financials could be keys to understanding how far the upside rally can continue and when a price peak may begin to warn of a potential price top or rollover.
An Island Top is a pattern that sets up with an upside price gap followed by sideways price action above that gap. In theory, this type of setup should promote the gap to be filled with downside price action before any further upside price move can continue, but gaps to the upside are fairly common in strong uptrends. Given the strength of the earnings data released early this week and the expectations that we have for some continued upside price bias over the next 10-35 days, we are watching these Island Top formations in the Financials for any signs of weakness to alert our followers.
This daily chart of the Direxion Daily Financial Bull 3X Shares FAS [ARCA] – $72.01 1.66 (2.36%) highlights the gap as well as the resistance levels that are currently acting as a ceiling. A breakout above the resistance level would indicate that we have more room to run higher. Any failed breakout to the upside, where price briefly rallies above the resistance level then falls back below it, would be a pretty strong indication of a rotational peak. The Financials could fall 10% from current levels and still be within the range of the March/April lows. It would take a much bigger move to qualify as a breakdown bearish trend.
This daily chart of the SPDR Select Financials XLF [ARCA] – $27.70 0.25 (0.91%) highlights a similar pattern to the FAS chart. The key element of the XLF chart is that the resistance level provides more key fundamental price peaks than the FAS chart.
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