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):
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:
Beyond SPX, other sectors and other asset classes have been confirming the bearish slant:
- Transports (TRAN) breaking down below a symmetrical wedge.
- 10y Treasury Yield (TNX) uncannily self-similar to its own 2q12 analogue, suggesting a slide lower.
- Volatility Index (VIX) has formed a fulcrum bottom (H&S) with slight bull divergence.
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):
¹2010 correction= 38%, 2011= 83%, 2012= 43%; I’m treating 2011 as a worst-case outlier, since policy action severely lagged in that instance.