The SP500 (SPX) has reversed
after today's early rally. Many will consider this bearish and it should therefore be followed by more selling in the short-term. This reversal was almost guaranteed at some point considering that we opened gap up this morning. We've now filled that gap but additional selling from the bears inspired by today's reversal should take the SPX down to the ST-S1 line that we drew a few days ago. This line also corresponds exactly to the confirmed Head-and-Shoulders Bottom (HSB) neckline (NL). Now that we've filled the opening gap, I expect to move pretty much sideways into the close (which did happen before I uploaded this report). Then, we'll probably be down tomorrow (hopefully gap down) with the SPX finding good support on ST-S1/NL. This down move will be a retest of the HSB neckline (NL) which is very common. If we can rally off ST-S1/NL, the HSB should be considered more reliable in its implication of an eventual SPX move over 800.
Another reason today's reversal
was pretty obvious is due to Symmetry. V-Bottom recoveries are often symmetrical to the preceding drop. NL2-? would be the area we'd expect the SPX to pause to create a mirror image of the preceding drop. NL2-? is also another potential neckline of an HSB, labeled HSB2-?. We need a right shoulder to form which would be done perfectly as the SPX drops back down to ST-S1/NL as discussed above. In a perfect world that right shoulder would be 3-5 days of consolidation between NL2-? and ST-S1/NL to mirror the late Feb2009 period circled above. However, it's fine if the right shoulder is abbreviated as long as it visually appears to be a right shoulder. If the HSB2 is confirmed by the SPX breaking out above NL2-?, the upside implication would be 900. I'd expect the move to be resisted by R1 which would turn the SPX back down to retest NL2-?. Then the SPX would move up and bullishly break out above R1 followed by more symmetry based pauses at 840 and 880.
Interestingly, R1 has an parallel counterpart
which creates a downsloping channel. When the SPX dropped below the lower boundary of the channel on 3/2/09, I expected a drop downward of the width of the channel to 640. It didn't quite happen as the SPX only dropped about 75% of the channel width. If we break out above R1, we should again expect a rise of the channel width to around 925. However, if again we only get 75% or so of that, we're talking about a move up to 900 exactly as the HSB predicts. Round numbers like 900 will also often provide some resistance.
Looking much further out...The intermediate trend is now dominated by a downsloping channel bound by S2 and R2. Whichever direction the SPX breaks out of this channel will probably determine the next intermediate-term move. If S2 were taken out, the SPX would probably drop to 450 as the Double Top implies.
However, another much better possible scenario also exists.
R2 appears to be around 885. I talked a lot above about a scenario that moves the SPX up to 900. But 885 should provide very tough resistance as there will be lots of sellers at R2 (unless we just blast right through it on a news-based rally). So, if R2 turns the SPX down, we again start to form the right shoulder of yet another HSB, which would be HSB3, with neckline drawn above HSB3-?. At that point symmetry would again suggest about a month of sideways movement and then a breakout above HSB3-? confirming HSB3.
The upside implication of HSB3
would be about SPX 1200. Again, before the SPX can make that level it's going to have to overcome R3. If R3 was overcome, I'd then expect a run at all-time highs for the SPX, basically an Obama Super-Bull.
Conclusion
My plan was to sell all capital not managed by mechanical methods at the first SPX close over 800 due to the SPX Double Top. Now, I'm not so sure and won't make that exact decision until I have too. Obviously, the further out you try predict something, the less accurate it's likely to be. I've laid out a bullish scenario that makes many assumptions. Technical scenarios like this always eventually fail at some point but in my opinion they are the key to making accurate predictions and sound discretionary trading decisions. The SPX is acting very well behaved lately. Our last few reports were very accurate both predicting SPX movements pretty much exactly and today's relative weakness in the Nasdaq 100 (NDX). How long that accuracy will continue is any one's guess. Having said that, every time the SPX makes one of the bullish milestones I mentioned above, the "End of the world, Double Top based SPX down to 450" scenario becomes less likely and hopefully will eventually fade into the history of false signals that make predicting market movements so difficult. I'll start by hoping ST-S1 supports the SPX as it corrects down a bit and we'll go from there.
