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.
