57% of these patterns end the same way.
That's not my opinion. That's Tom Bulkowski's research, the most cited body of work on chart patterns in technical analysis.
The pattern is called an ascending channel, and SPY is sitting at the level right now where the trade triggers.
The market is at all-time highs. SPY is over $737. And I'm getting ready to short next week.
I'm not bearish, I don't think the rally is over, and I'm not calling a top.
I'm reading a pattern that has a name, has documented historical performance behind it, and is showing up on the SPY chart right now in textbook form.
An ascending channel is one of the most basic and most reliable structures in technical analysis.
Two parallel upward-sloping trendlines, with price moving in a steady rhythm between them, where the lower line connects higher lows and acts as support while the upper line connects higher highs and acts as resistance.
As long as price stays inside the channel, the pattern is intact.
Look at the cyan lines on the chart. That's the channel SPY has been respecting since the March lows around $629. The market has tagged the upper line, pulled back to the lower line, and rallied back to the upper line in clean rotations the entire way up.
Right now SPY is sitting at the top of that channel.
Here is what most traders get wrong about a setup like this. They see the market at all-time highs and assume it has to keep going up because momentum is strong, but the pattern says something different. Inside an ascending channel, the upper line is resistance, not breakout territory.
The mean-reversion trade is to short the upper edge, take profit somewhere closer to the lower edge or the middle, and let the channel structure do the work.
The historical data backs this up.
Tom Bulkowski's research on ascending channels found that 57% of these patterns ultimately break downward despite being formed inside an uptrend, with an average post-break move of roughly 20%.
Betting on the upper line as a short zone is on the right side of the math.
This is the difference between trading the structure and trying to predict the top.
I'm not predicting anything, I'm not saying the market is going to crash, and I'm not saying the rally is fake.
I'm reading what the chart is showing me, and the chart is showing me a setup that has a name, has historical backing, and has clean levels for both entry and exit.
What would invalidate the trade is also clear.
If SPY closes above the upper trendline with conviction and holds there, the channel breaks to the upside and the short setup is gone. Every structural trade has a level that proves the structure wrong, and you have to know what that level is before you put the trade on.
In a couple of days I'll be sharing some really exciting news about something I’ve been working on behind the scenes.
I know that sounds super vague, but Hannah made me swear not to let the cat out of the bag just yet. So I am going to keep my promise.
But check your email for an announcement on Sunday, which also happens to be Mother’s Day.
Make sure to do something nice for that special woman in your life.
Rock On,
Voz