Has the U.S. Stock Market Formed a Triple Top?

by James DiGeorgia | 06/10/2019 11:39 AM
Has the U.S. Stock Market Formed a Triple Top?

The triple top pattern is a chart pattern used in technical analysis to predict the reversal of an uptrend. The pattern occurs when the price of an asset creates three peaks at nearly the same price level. The area of the peaks is resistance. The pullbacks between the peaks are called the swing lows. After the third peak, if the price falls below the swing lows, the pattern is considered complete,  and traders watch for a further move to the downside.

By James DiGeorgia

Fortune, one of the most credible and well known financial magazines and news organizations, asked the question on Friday …

“Are we seeing a “triple top” formation?”

In response to this question, Fortune asserted…

“If so, that doesn’t bode well for anybody who has enjoyed a bull market that by most counts started way back in 2009.”

While Technical analysts track statistical trends, a triple top may not be the predictor of the end of the bull market or predictor of a significant market reversal however Peter Lynch and his former Chief Technical analyst back during his days at Fidelity Phil Erlanger would tell you ignoring a triple top pattern can be extremely perilous.

David Kudla, the CEO of Mainstay Capital, told Fortune on Friday that the red flags are accumulating…

“We saw the formation of several bearish technical patterns taking shape… The S&P 500, which started today at 2843, has been trading in a range for the past year and a half, hitting a high in almost exactly the same area three times: 2873, 2931, and 2946, then trading lower. In other words, if you invested at the high in the S&P 500 on January 21st of 2018, you’re actually below where you started.”

The last time a triple top formed was back in 2013, but it resolved itself by breaking through the resistance levels preventing the stock market from rising. Phil Erlanger, Erlanger Research, LLC. Points out that you can’t call it a triple top unless the stock market breaks and falls through support and agrees with Technical analysts quoted by fortune that it hasn’t occurred since the period between 1965 and 1976 when the market fell more than 40%.

If the market is unable to push above the record levels hit last year because of fear of…

·     Trade tariffs and their harmful effects on the economy

·      A war with Iran

·     Likelihood of Trump’s being confronted with a poisonous impeachment inquiry that could expose the President to criminal charges beyond his exposure as an un-indicted co-conspirator in the SDNY case that his former lawyer Michael Cohen plead guilty to last year. The triple top could be proven.

In Fortune’s article this past week Kudla the CEO of Mainstay Capital is quoted as saying he doesn’t think that’s the direction we’re going…

 “The rebound of just the past couple days has already changed that technical backdrop. Both the S&P 500 and DJIA have managed to break trend lines and move back above their 200-day moving averages. There is clearly an upward bias to the markets this week.”

Many technical analysts believe Fed Chair Jay Powell helped stabilize the market this past week by hinting at his willingness to lower interest rates after the ADP jobs report showed only 27,000 new jobs in May were created, along with a downward revision for April.  

Tobin Smith, the CEO, and Founder of Transformity Research, was quoted in the Fortune article as saying…

“Based on the weak jobs report, that green lights the Fed to cut rates 50 basis points at the June meeting at the earliest or September at the latest…But if there’s no sugar from the Fed, the bottom of the trading range could break.”

Smith is alluding to the S&P 500 falling to below 2416 as traders capitulate and get out of the market again, leaving the index looking for a new, and undetermined, support level.

This would mean the DOW could potentially fall 3,000 points or more from the loft 25,700 level. Still, that’s very scary when you consider that would not qualify as a correction but would send the Dow Jones within 5% of the bear market territory.

Yes, there are still bulls among technical stock market analysts some are saying don’t worry… what we are seeing is an “inverted head and shoulders” formation.

This alternative interpretation to the price movements in the market indicates the big sell-off, and low we observed take place in December as Trump sat in the White House during the government shutdown this past December has helped form the head, and that this means the trading that takes us higher would form the second shoulder. If that is the case, the current rally close this week could make what appears a triple to be instead a bullish sign that new highs in the markets lie ahead.

Another analyst cited as being bullish and dismissing a triple top is Gus Scacco, CEO and Chief Investment Officer of Hudson Valley Investment Advisors who was quoted by Fortune as saying…

“I don’t believe it’s a triple top, but part of building a base. If the U.S. actually does lower rates, this will force most developing economies to cut rates to keep pace with the U.S.”

Guy Ortmann, the Senior Technical Analyst at Scarsdale Securities, agreed with Gus Scacco…

 “First of all, the long term uptrend line remains intact; each high has been higher than the previous high, with the exception of last December, that I view as a real anomaly exacerbated by computer trading. Assuming a trade war doesn’t kill our forecasts, there is very high volume support around the 2780 level on the S&P.”

Tobin Smith suggested to Fortune…

“Perhaps the biggest threat to the stock market right now is money managers—and CEOs—doing nothing. In the real economy, major executives with global exposure and global supply chains may just sit and wait and see how this show goes.”

None of these analysts, executives or traders made any mention of the looming debt ceiling raise and how President Trump’s penchant for brinkmanship might reproduce the standoff he put the country through this past December. Nor did they mention the danger that Trump in facts heightens the trade war with China in the aftermath of the G20 meeting coming up. The growing danger of the sudden outbreak of a shooting war between Iran and the United States seems of no concern to any of those interviewed by Fortune for their article on whether we are going to see this triple top as a culmination of this nine-year-old economic recovery and bull market.

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