Head and Shoulders and Divergences on Daily SP500

sni

Head and Shoulders and Divergences on Daily SP500


Jul 2, 2009: 6:54 PM CST
It’s being broadly circulated around the analysis circles, but there appears to be a distinct Head and Shoulders forming on the daily chart of the S&P 500.  I’m picking up volume and momentum divergences as well, hinting that lower prices are yet to come but let’s take a look at these structures and what they might mean for traders.



With today’s 3% free-fall (Trend Day Down) in the broader stock market, it appears now that the dominant technical pattern is the developing Head and Shoulders on the S&P 500.

It’s not guaranteed, of course, but according to classical technical analysis patterns, we would expect the next move in price to be a ‘magnet trade’ down to test key support about the 885 level in the index.

This support is strongly established as the February highs along with the May lows.  This level also forms the “Neckline” of the expected reversal pattern.

A break (and clean close) below 880 could trigger a flood of short-sell orders (and stop-losses from buyers) which could create a ’self-fulfilling prophecy’ as traders and investors push price lower.

The classic measuring move is the distance from the Head to the Neckline (about 75 points) which is subtracted from the neckline at 885 to give us a target from 800 to 810 for the next level of possible pattern support.

Take a look at Volume, which has been steadily trailing lower as price has creeped its way higher.  That serves as a non-confirmation of higher prices and hints at an impending reversal.

Finally, look at the 3/10 Momentum Oscillator - as price has been inching higher, the 3/10 Oscillator has been making lower highs along with price, and has even set-up the dreaded “Three Push” reversal pattern (a triple negative momentum divergence, which you see if you look closely).

As a caveat, there’s no guarantee price has to break these levels, and one astute reader (Michael) even noted in the comments of the prior post, because the Head and Shoulders pattern is so obvious, it might be ‘faded’ or fail to materialize because so many people are watching it.  No one said trading had to be easy!

Until we see something different, this is the current price structure of the S&P 5oo as we head into the holiday weekend.

Find more information about our new Weekly Inter-market Technical Analysis and the Daily Idealized Trades member service which have just launch at the Premium section of Afraid to Trade.

Corey Rosenbloom, CMT

xiaobailong

风清扬

1# sni


target 是多少啊？现在看起来也像熊旗， 大概spy到82-84左右？

lake3peat

Check the comments. It's a gem there, especially the part on FAZ!
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I think the 3-push pattern is the most encouraging for the bears/worrisome for the bulls. The potential break of the 50day (probably too close to call a break at this point) is also of interest. The volume divergence... it's summer so you expect volume to tail off anyway, so that may just be a function of the time of year rather than a sign of weakness in the market.

The general 880 area "should" be strong support. Several candles tested it from below before the breakout, and immediately after the breakout I count 6 candles that tested it as support from above.

Also, let us not forget the bearish rising wedge from mid-April! We had a volume divergence, we had a 3/10 momentum divergence, and price was hitting up against the February highs. Perfect place to take some shorts and I took some that Friday afternoon, risk/reward seemed quite good so why not. Over the weekend as I surfed around the blogosphere I kid you not - every single blog I visited was bearish and almost all had that same pattern posted and right away I'm thinking "uh-oh..." LOL! So on Monday we have a monster gap down and I'm thinking "ok, maybe it will sell off after all", but after the gap there was very little follow through and we ended up finding support at the 20day ema and shooting up to new highs 2 weeks later. Which was to the surprise of pretty much everyone - including me!

In any case a break of that neckline would offer good risk-reward, so probably a good trade. Can't get ourselves psyched out worrying "what if it's a fake-out"... just have to take our positions and let the market do what it's going to do.

Incidentally - I notice that if you bought FAZ at the top of that false rising wedge when the S&P was around 875 you'd have paid around $10. Now with the S&P at 896, basically one more down day away from being back at 875, FAZ is just over $5 - nowhere near the $10 you paid for it. So if the S&P gets back to 875 there's no way FAZ will be back to even - it'll probably be around $6 or so. If you shorted ES at 875 and not stopped yourself out you're one down day away from being even. If you had done the same with FAZ you're nowhere near even and who knows how low the S&P would have to go to get you back to even! Scary!!!