Diary of a Financier

SPX Weekend Update: Yes, Another Head & Shoulder Top (and a Mess of Bear Divergences)

In Capital Markets on Fri 28 Sep 2012 at 17:45

I noticed a Head & Shoulders top developing in the S&P 500 (SPX) a week ago. At that time, I thought we were in the early stages—still forming the left shoulder:

“[W]e may burst up to new highs, at which I may liquidate high-beta, risk-on assets. I hate to be so procyclical (as we’re in a risk-off spell lately), but that new high should establish a ‘head’ for what can develop into a Head & Shoulders top.”

As I followed the 2q12 analogue throughout this week, I started to notice that indicators, in particular, suggested that the left shoulder had already been formed. Further, when SPY hit $148 on September 14, the head had developed too. The high, the top, the peak are in; the classical H&S top pattern is governing SPX.

Thursday offered a gift, a 1% rally that I didn’t feel I deserved. (I got too cute with some limit orders in XME & IWM on Wednesday, my sells didn’t fill, and I sat stubbornly with the positions overnight.) Hence, into the close on Thursday, I started liquidating my big beta, which activity was hastened by SPY bear divergence on its 1-minute chart in the last half-hour of trading.

As it stands tonight, you’ll notice that SPX is riding a support trendline in its primary bull channel. Any melt-up higher to star next week (fundamental hopes of Chinese easing mid-week?) is another gift to sell into. The analogue shows the next downside snag at SPY’s support >$142 (from the 4/2012 high):

SPY daily- tightly tracking 2q12 analogue and clinging to trendline support of primary bull channel.

Zooming out a bit, you see the daily fractal confirmed bear divergence this week. The weekly chart still shows some damning bear divergence of its own–not to mention that the 2q12 analogue fits all fractals:

SPY daily/weekly/monthly- bear divergence in daily & weekly charts.

~~~~

Beyond SPX, other sectors and other asset classes have been confirming the bearish slant:

I’ll have some more coverage of these developments as everything materializes, but right now I don’t expect new lows (or highs) from any of these constituents. The base-case scenario¹ for an SPY correction is a 40% retracement of this rally from lows, which would complete the H&S followthrough ~$137.

~~~~

Week-end closing prices (4:00 est):

SPX= 1440.67
ES/= 1434.25

–Romeo

¹2010 correction= 38%, 2011= 83%, 2012= 43%; I’m treating 2011 as a worst-case outlier, since policy action severely lagged in that instance.

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  2. […] correcting.  I’ve recorded my thoughts throughout this process, and I’ve been shedding Beta for more than two weeks.  Today, SPX closed -1.66%, providing all the confirmation I needed […]

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