Head and Shoulders Top? S&P 500 to Consolidate and find Lower Trading Range

S&P 500 Market Top?


The U.S Stock Market as represented by the S&P 500 has made a good run, from S&P 500 level of 666 to 1219.80 for a strong rally.

However, based on the Chart Annotation above, the S&P 500 may have hit a Head and Shoulders Top, a Technical Pattern (analyzing patterns based on stock chart patterns) that suggests that a Top has been made and a downtrend could ensue.

Consolidation Pattern then Breakdown or Breakout?



Longer Term, the S&P 500 market may re-test the Previous low of 666, or a more likely situation, the S&P 500 market will start to consolidate into a sideways Symmetrical Triangle Pattern as shown in the chart above.

In the Symmetrical Triangle Pattern, the Stock or Market trades in the triangle, until it reaches closer to the end of the triangle, and then the market may break upwards, or downwards.

The Market does look like it may be going lower and find a lower trading range for now.

S&P 500 Stock Chart Today

How far can this (Bear Market) S&P 500 Stock Market Rally Go?

On March 10, 2009, the S&P 500 went up 6.37%. Some pundits are calling for a bottom, but many see this as merely a Bear Market Rally.

How far can this rally go?



First major candidate is S&P 500 level of 740 to 760. This was the previous low held late in 2008, and is also the level that held in the Bear Market Bottom of 2000-2002.

Another candidate is the breakout point off a symmetrical triangle pattern.

Previously, this blog demonstrated that the S&P 500 recently broke down from a symmetrical triangle.

According to stockcharts.com:

Prices sometimes return to the breakout point of apex on a reaction move before resuming in the direction of the breakout. This return can offer a second chance to participate with a better reward to risk ratio. Potential reward price targets found by measurement and parallel trend line extension are only meant to act as rough guidelines. Technical analysis is dynamic and ongoing assessment is required.

It is possible that the rally could continue to this breakout (breakdown) point of around 825 on the S&P 500.

The 50 day moving average is very close to the 825 breakdown point on the S&P 500.

Overextended from the 200 Day Moving Average

The S&P 500 is also very overextended underneath the 200 Day Moving Average. This suggests that the rally could have some room, or go sideways long enough for the 200 Day Moving Average to catch up.

Today's Stock Chart of the S&P 500

Stock Market (S&P 500) Breakdown to New Levels Has Begun

For the last three to four months, the Stock Market, as represented by the S&P 500 has been trading in a symmetrical triangle pattern. This blog has been saying that breakout would occur soon, sometime during February.

On Tuesday, February 17, 2009, the S&P 500 has finally broken down from the symmetrical triangle and is starting a new downtrend.



There is major resistance at around the 740 to 760 level from the November 2008 lows of 741, and the major low of 768 during the last Bear Market from 2000 - 2002.



While the stock market could bounce off these lows again, based on the breakout from the symmetrical triangle pattern, we could hit a low of 558 on the S&P 500. [Since the maximum range of the previous triangle is 267 (1007 - 740 = 267), we apply this to the breakout point of 825 to come up with a downside target of 558 (825 - 267 = 558)]

This matches this blog's analysis of a S&P 500 bottom of 450 to 600.

Notice that if we break down below the major S&P 500 bottom of 740 to 768 on the S&P 500 set in 2002 and 2008, there is not much support below:



We do appear to be in the middle of a long term secular bear market that started in 2000 and will end around 2016.

Today's Chart of S&P 500

Stock Market (S&P 500) Breakout Soon! We are near end of Symmetric Triangle

The Stock Market, as represented by the S&P 500 ($SPX), is very near the end of a symmetrical triangle (see chart above).

The Market has gone back and forth inside of this triangle, and the market is consolidating the move from the all time highs. The end of the triangle converges in March, and because there is often a breakout around 1/2 to 3/4s of the pattern, it is about time the market breaks out.

According to Stockcharts.com and Edwards and Magee, "roughly 75% of symmetrical triangles are continuation patterns and the rest mark reversals." Since the previous trend from the all time highs was down, the continuation means further downside.

Previously, this blog analyzed the potential depth of the decline, and we estimated that the downside target is 600 on the S&P 500, a drop of around 27% from here (S&P 500 value of 827). This matches another analysis by this blog which suggested that the long term S&P 500 bottom is from 450 to 600.


Today's S&P 500 Chart

Stock Market Breakdown from Symmetrical Triangle?

In our last blog entry, the S&P 500 appeared to be in a Wedge/Symmetrical Triangle.

However, as with most patterns, we need confirmation (strong breakout with high volume above upper trend line), and the (ongoing) pattern did not turn out to be a bullish one.

However, if we generically call the pattern a symmetrical triangle, the interpretation would be a triangle, that could break either way (up or down). This pattern will require confirmation as well, with a breakout above the upper trend line, or a breakdown below the lower trend line, with volume.

Let us see how much volume there will be in the possible breakdown this morning (Futures are down very big before the market opens).

Today's S&P 500 Stock Chart

NYX Stock in a Holding Pattern (June 6, 2007)

The New York Stock Exchange-Euronext Stock seems to be in a holding pattern. The multi year uptrend remains intact, but there has also been a 7 month downtrend, forming a symmetrical triangle. With this pattern, a stock normally trades within this triangle, and near the end, the stock may break out (up or down) on good volume. We can determine which way to trade/invest based on the direction of this breakout.

Currently, stock is stuck between support at around $79 and resistance at the 50 and 200 day moving average above. The stock is also being restrained by the symmetrical triangle described in the chart.

In the lower indicator window of the chart, there is a Bollinger Band Width indicator. Based on previous history, when the Bollinger Band Width is 5 or lower (on this stock), the stock normally has a large change in price (either up or down). Right now, Bollinger Band Width is around 6. So we are almost there.

Overall, NYX is in a holding pattern, but a big move to the upside or downside could be coming within the near to intermediate term future.