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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Resistance Levels Hold, BAC, JPM Slide

The S&P Index failed to break 1200 for the third consecutive day of testing and other sectors seem to be finding their own resistance levels as well as the market closed for this first day of this short trading week.

The dollar index finished marginally higher though the euro was surprisingly strong considering the bailout that is coming to Ireland. In the precious metals sector we are slowly approaching overbought territory on the stochastics and RSI while it appears that we are finding resistance there in addition to the S&P.

Stock in Bank of America had another rough day as shares finished down 3% and are on the wrong side of a 9 and 20 day MA cross although they have not yet tested the $11 support. However, the price channel is trending downward and suggests that $11 may not be the bottom of this chart. In addition, it would need to rally a whole point in order to pierce the high side of the channel.

Recent selling volume has been substantial and the reason for the bounce off of the support was most likely a short setup after QE II. In the extreme short term, the stock may be oversold, but the RSI confirms that there is at least price stability which means that there could be another small bounce before testing $11 again. Price action in Bank of America is paramount to the overall market and I believe that this is serving as a leading indicator for what lies ahead.

Shares of JP Morgan also had a hard day as the stock broke through a recent price channel that appeared to be a clear cut bullish flag. A bullish flag is a generally a money indicator but today the stock pierced the bottom line in the channel to the downside which negates the formation.

The 13 and 50 MA’s are turning to the downside and it appears that the next major support is at $38. I expect that to be tested if the overall market continues to struggle with overhead resistance.

Citigroup Bullish Flag, Possible EMA Cross

Citigroup recently announced positive earnings and despite the good reports, the stock price has consolidated in recent weeks. Citi has also lagged the major indices, but technical indicators are saying that the trend is about to reverse almost immediately.

Goldman Sachs issued a stockwatch today for several stocks including Citigroup and the chart above may help you to profit from a bull flag indicator that has taken place since the beginning of October which had some analysts worried about the financial sector due to the fact that it had been lagging the market.

I think that the flattening in the RSI and the 50% pullback on the slow stoch combined with the impending 50/200 day EMA cross validates the consolidating bull flag and proves that Citi is undervalued compared to the market at this point. The selling volume has also dried up and it looks like it could reverse very shortly… perhaps a large positive volume spike will take place in the next few days. In any case, this chart says that C is on that verge of breaking out to the upside and it appears that there isn’t much time left before it begins to catch up with the market.