Diamonds are Forever

As proof positive that I am here in my office playing computer games and enjoying my coloring books, my latest rendering above is a diamond formation using half-day candles (195-minute) on the S&P 500 index. As the wife says, “if the shoe fits.”

But honestly, there is such a formation in the markets, and it typically occurs at a top. The “diamond formation” words above are linked to the Investopedia technical definition for those interested in the details. For now, realize that the breakdown of the formation leads to a measured move down from the corner of the formation equal to the distance from the top to the bottom of the middle of the diamond. We would look for evidence to reenter around that measured distance.

In our current case, the distance is 50 points. Since we are cornered around 3900, we would look for bottoming action around 3850. The market still must confirm it is grounding there for us to reenter, because the 50 point move is the minimum to be expected.

So why do these patterns develop, giving us such predictable consequences? I am not sure we will ever know the precise answer to that question. I suspect it is because we are all playing the same computer game. Perhaps it then becomes a self-fulfilling prophecy.

Given the pattern and its connotation that the market is balanced between bull and bear forces until the design breaks, I view the key references today as go/no-go triggers. Use the 3928.50 all-time high as the upper reference point to negate the pattern entirely. 

Use the 3909 settlement (close) as neutral. Incidentally, the S&P 500 futures have settled at that same 3909 close for four sessions in a row. I have never seen that before. The “settlement” at the futures pit in Chicago is considered the final “closing price.” The price can vary slightly from the print close you see on your quote service.

A violation of the balance area low at 3878.50 would indicate that the pattern is on its way to completing the top formation. That would leave the projected mark low at 3850 as a target. 

The volume point of control sits just above that at 3855.25. I will be using the 5-minute chart at those levels to look for bottoming evidence. Exploration below 3850 connotes more ominous behavior – so be careful. The cyclical pull here is not strong – so we should pass through this mid-month low without a bloodbath. That is my best guess.

If the diamond discussion is all for not because the music is still blasting at this party, the curfew sits around the upper channel line and Weekly Expected Move high at 3950. Given all of that, the trade I am looking for is likely to develop later rather than earlier in today’s session.

The intermediate, swing-trading Navigator model is 100% in cash. It may throw some buy signals at the 3850 targets. We shall see but stay alert.

A.F. Thornton