Nice rally back up to test Head-and-Shoulders Top Neckline.

Today's SPX rally is a textbook retest of the Head-and-Shoulders Top (HST) Neckline (NL). The minimum objective of the HST is down to around 825 (HST-OBJ). We also have a downtrend line (R1) appearing to form.

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Patterns in the indexes are often not perfect and as I've always said 75% accurate at best. If we assume that this pattern is going to be accurate (which I believe it will be), we could possibly drop obviously tomorrow after the NL retest and move quickly down to 825. Another possibility is the imperfection scenario whereby the SPX moves higher to R1 and is not properly resisted by NL. Also, the SPX could move sideways for a while and eventually tag R1 while still not closing above NL. There's really no way to know which of these cases will unfold. But I do think the next significant move will eventually be down to at least 825 where I'll be looking at re-entering long with accounts not managed by mechanical methods.

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Another interesting point is that around holidays the financial data is usually filled with errors for some reason. In the chart above there is no downside opening gap visible on the 7/2/09 open (gap?). But in the intraday chart it's clearly there at 922 to 924. I believe it does exist and so it remains an unfilled overhead gap.

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Bottom line is I'll be expecting the drop to 825 and as we get close, I'll develop a buying strategy.

Will most likely exit today.

I will be using the same exit rule today as I posted yesterday. As of now (1:30p Mountain), that would cause me to exit to 100% cash with all accounts not managed by mechanical methods.

Testing Head-and-Shoulders Top (HST) neckline.

The SPX is trying to confirm a rather large Head-and-Shoulders Top (HST) by closing below the neckline (NL). If the HST is confirmed I'll expect a drop to at least 825 (HST-OBJ) which isn't something that I'm willing to ride out. Therefore today, if the SPX is at or below 887 (which is today's early low) at my fund cutoff time (~10 min before the close), I'll exit to 100% cash with my accounts not managed by mechanical methods.

I do have quite a bit of hope for a reversal today back above NL and thus no confirmed HST. We have two unfilled gaps overhead (G1, G2) which should tend to resist further downside. We had a late-day sell off before the holiday that took out extremely minor support at the level of the expected downside objective from the 7/2/09 open which gapped down and out of an uptrending channel. (Channel break downside objective = CH-OBJ). Then we opened gap down this morning.

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Right now (11:45am Mountain), the SPX is trying to move higher to fill the gap G1. If this happens too early in the day (like now), we could get some selling which would move the SPX down to lows at the close. The action near the close today is going to be very interesting. If buying can come in late to close G1 and the day closes up to near today's highs, I'll expect more upside to fill G2 at over 920.

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On the other hand, if we close down near today's low, I think the HST will be considered confirmed and we should move lower to at least 825 eventually. I won't necessarily expect the drop to occur immediately and there may be another move back up to NL which will be an obvious exit point if we miss this one.

SPX consolidation

As I said last time I expected the SPX to move sideways for about a month and we're now eight days into it. The gap (G1) still has not yet filled and it probably will. ST-S1 is roughly the confirmed Head-and-shoulders Neckline (NL2) which has now been tested approximately three times. My current plans are to just sit tight hoping to sell at SPX 1000 or higher but that could change if we are near ST-R1 (950) at a market close I might be tempted to exit and buy back in on any lower close inside this little trading range.

Another Head-and-Shoulders Bottom (HSB) Confirmed.

The SPX has broken out above NL2 confirming another HSB. The upside implications of HSB1 and HSB2 are 1075 and 1200, and are indicated on the chart above.

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Today opened with an upside gap. This should tend to pull the SPX back down to retest NL2 and attempt to fill the gap. Since we have two more days of the early June seasonally bullish bias, I'm still hoping this rally has the legs to reach near 1000 (NL3?) quickly. If it happens in the next few days, I will take profits hoping to reenter at the NL2 retest, which I believe will remain likely until NL3? is overcome to the upside.

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I expect NL3? to provide significant resistance to the SPX. I expect the SPX to consolidate between NL3? and NL2 for a month or so just like what occurred in May between NL2 and NL1. The resistance at 1000 (NL3?) may become such an obvious place to exit that NL3? ends up sloping downward just as NL2 did.

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I'm not sure about my exact sell strategy at this point but I'll keep you posted.

Good rally without an opening gap.

The SPX has rallied well today off NL for the second retest of the Head-and-Shoulders Bottom (HSB) Neckline.

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It appears that there are a lot of sellers at the 920-930 level which has produced a downsloping line R2. That line in conjunction with S2 (which is just an extension of NL), is producing a flat bottomed triangle. When these triangles form, the slightly most likely break is through the horizontal boundary which in this case would be down. If that were to occur I'd expect a drop of the width of the triangle which takes the SPX down to just under 850 (T-OBJ). In making that drop, S1 is also taken out. This would imply a drop of the R1/S1 channel width down to about 800 (C-OBJ). I'm not too interested in riding out that drop. If that drop were to occur, I'd consider it part of symmetry replicating the p750 low but reduced in both time and amplitude, which is very common in symmetrical moves.

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The good news is that at tomorrow's close starts a historically bullish seasonal period (detailed below). That leads me to believe the break out of the triangle should be up with seasonals overruling a slight tendency to break though horizontal boundaries as opposed to sloping boundaries.

End of May/Early June

Historically, if one had been long the SPX on the last two trading days of May and first three trading days of June, they'd have returned:

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1942-Present Winners: 64% Annualized Return: +40%

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1990-Present Winners: 58% Annualized Return: +42%

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2000-Present Winners: 56% Annualized Return: +56%

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Therefore, I plan to just ride out these five days hoping for an upside break out of the triangle confirming another HSB with neckline NL2? I wouldn't be surprised to see the SPX test NL1? before the Wednesday June 3rd close on which the seasonally bullish period ends. If that occurs I'll probably take profits as I expect SPX 1000 to offer stiff resistance.

I'll give this position some room.

I've entered 100% long with account not managed by mechanical methods near the low on the retest of the Head-and-Shoulders Bottom (HSB) neckline (NL). This HSB implies an eventual move to around SPX 1100 (NL-OBJ).

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It appears to me that the SPX is trying hard to replicate the mirror image of what it did before the March 2009 low (HEAD). It appears we're at about the point p1 on the graph above. The Early-October - Early-January 2009 consolidation took about three months to complete so I wouldn't be surprised to see the SPX do the same thing now a bit abbreviated in amplitude and time which is common on the right side of symmetrical moves. This consolidation should be pretty frustrating for most.

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I wouldn't be surprised to see both NL?'s eventually overcome, confirming other HSB's implying even higher moves in the SPX.

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For now I'm going to give this position some room to operate and so I currently have no stop level where I'll panic out of this position.