S&P500 Update: Is a potential head and shoulders pattern forming?

On Thursday the markets rallied hard and the Bulls were able to get price back above the (green) trendline that connects the December 2018 and June 2019 lows. Thus holding the uptrend in tacked, technically, for now. But today they have -so far- been unable to hold price above the 50 day Simple Moving Average (50d SMA). So that is a feather in the Bear’s hat. BUT, price will have to close back below this green uptrend line to give the Bears more credit. So let’s look around a few corners to see what could happen next.

Figure 1. Possible Head and Shoulder Pattern Forming on the S&P500

IF the Bears can close price below the green up rend line, then a simple symmetry based price target (black arrows) point towards ~SPX2725. That would equal the June low and set us up for a possible head and shoulder pattern. See here for a detailed explanation about this pattern.

Namely, those two identical lows could then be forming what is called “the neckline” From there a possible another “suck in all the Bulls” rally could ensue to form a right shoulder (green arrow) to around SPX2930-2945. Once complete, then the next down move (red arrow) should start. A break below the neckline then targets -based on simple symmetry- SPX2425.

Thus although there are a few more twists and turns to be expected before this possible pattern completes, with such a downside potential forming, it is time to monitor the possible formation of this pattern because: forewarned is forearmed.

Trade safe!

Arnout, Ph.D.


Founder and President Intelligent Investing, LLC 
Vice President NorthPost Partners, LP

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