Head & Shoulders Bearish Reversal Forming In SPX Short-Term Data

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By Christopher Diodato

The market is once again in high spirits this morning, with hopes that the Bernanke will once again dump easy money on the American public.  The technicals are suggesting, however, that any rally will be short lived.  Specifically, the S & P 500 is tracing out a reversal pattern called a “head and shoulders top.”

If the S & P 500 can break above the 1420 level, this pattern would be considered “busted,” but a break below 1395 would activate a sell signal with a target of 1370.  Besides the price action, volume (not available on the chart) also shows a perfect reversal personality, with lower volume on each advance and higher volume on each of the declines.  The RSI “sell mode” note is based of a system I created that has given backtested returns of 300% on ten different markets in the past decade.

I’ll be looking forward to the speech at 10, but don’t see it becoming much of a market event.  Some major market pivots occur next Thursday, so we have three choices.

• Bernanke does something drastic, sending markets up today, and reversing down next Thursday (To see potential economic consequences of new QE, click to see our article posted on Seeking Alpha!)
• Bernanke does something, but the market doesn’t care, so the market begins a new trend next Thursday
• Bernanke does nothing, making markets drop, and reversing back up on Thursday

Happy trading!

~Chris Diodato