S&P Potential Head & Shoulders

A saw that few people pointed this out over the past week and though the right shoulder is weak, it’s still a legitimate pattern. For those who don’t know the math behind it, the neckline (1300) is subtracted from the peak of the head (1370). Then, the sum (70 points) is subtracted from the neckline (1300), some analysts use the breakout point instead, which in this case would be 1315. Regardless, the price target in this case is within 1230-1245. However, given the long term pivot of 1227 and the tendency that the market has to capitulate and overcorrect even after the bad news is out, it’s safe to say that based on this pattern, we’re likely to be headed for 1227 once again.

There will be levels along the way, such as the 200 MA which will meet the YTD lows that are at 1260-1265. This is a significant level because it is the level that we opened at on the first day of 2011, and it is the level that we closed on when the market bottomed during the tragedy in Japan. This pivot can be played from the long side but ultimately I’ll remain short the market.

Also, I would like to say that this particular pattern doesn’t mean much to me outside of added confirmation to what I have already been saying for the last two weeks. The reason I decided to post this was because I found it interesting and because I have heard others mentioning the potential for this head and shoulders top to play out. In any case, as I said before, I’m still short the market but am playing the long side for options expiration. After that, I’ll use the upcoming bounce as another shorting opportunity.

Another interesting statistic that I did not include in my commentary last week is the S&P closed negative for six consecutive weeks with Friday’s close. The last time we had five AND six consectutive negative closes on the weekly chart of the S&P was the week of June 2nd, 2008 through July 14th, 2008. Again, we have not had five OR six negative weekly closes in a row in three years. The last time we did this for four consecutive weeks was Feb 9th, 2009 through March 2nd, 2009. This supports my prediction that we will have a bounce next week, but not a reversal as we have not had volume and price capitulation or a spike in the VIX yet.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

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