SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend

My researchers and I want to highlight a weekly chart pattern that is warning of a potential Top/Reversal in the SPY & SPX. Although the current trend is bullish and the markets are looking forward to the new year, new policies, and probably new stimulus which normally prompts some type of upward price rally in the markets, we see an “Island Setup” that has continued to form after all the positive COVID-19 vaccine news.

An Island Setup in price is when price moves or gaps away from a typical price range or boundary and then stalls. This type of setup is similar in structure to a Doji Star setup in an “Evening Star” formation. Similarly, the Doji Star pattern also warns of a possible trend reversal. Our researchers believe any continued failure to rally at this stage points to a very real downside price reversal setting up in the SPY/SPX. Let’s take a look at some weekly charts.

SPY Island Setup

The SPY weekly chart below highlights the Island Price formation, as well as the technical divergence in the RSI indicator (below the price chart). What interests our researchers is the clear Island price setup outside the cyan consolidation/Flag formation. Either the SPY is going to continue to rally much higher at this point, or it is going to fail in this Island formation and fall back to the $320 level. The more price fails to rally at this stage, the more likely the downside price expectation becomes.

SPX Island Setup

The following SPX weekly chart shows a similar pattern with the same RSI technical divergence. Take note of the Double Doji Island setting up recently, and how Double Doji patterns are very indicative of market indecision and potential reversal patterns. The most important single candle in the Japanese Candlestick Theory is the Doji Candle.

We’ve also drawn a Fibonacci Extension range on this chart and want to highlight the 125% Fibonacci Extension (in magenta). This level appears to show very strong resistance and could become a make-or-break price level for the SPX in the future.

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