Which Way Market?

Friday's big down day put the S&P 500 back into negative territory for the year. As shown in the first chart below, we've been in negative territory for the year much more than we've been in positive territory. The S&P has been flirting with both its 50-day and 200-day moving averages and its 2009 starting level for much of the past month. All of this sideways buildup means that the eventual break in either direction will most likely be an extreme move.

click to enlarge

Unfortunately, market technicians are focusing on the head and shoulders formation that could spell trouble if the 880 support level on the S&P breaks. Art Cashin of UBS mentioned it this morning on CNBC, and below we provide a chart showing the head and shoulders pattern. The textbook suggests that a break below the support level shown in the chart spells doom for the market going forward. Hopefully we don't have to even test the pattern.

Comments

[Macro_Man:]

It looks like S&P is going down; head and shoulders is one reason, also "Bullish Measured Move (Bullish)" from the March lows. Good news is that the correction will be shallow. Low 800s to mid 800s. Then we should get a strong rally to 1050/1150 range.

This is the time to be short or to the sidelines and get back in after a few weeks and ride the last leg of the bear market rally.

Jul 06 10:38 AM

[Larry House:]

What will provide the basis for an S&P rally to 1050/1150? This is a trader's market. Be careful.

Jul 06 10:44 AM

[BigJake:]

Larry, your point is well taken but what provided the basis of the rally from March to may (s&p 666 - 950)??? I still can't explain it...

Jul 06 02:39 PM

[tobi:]

Those head and shoulder stuff is meaningful only because people believe in it. A big move to either side ? I am trying to think also what could be the reason to trigger such a rally and can't come up with anything big enough, however they have been very creative at inventing reasons over the past month with their "market to myth" accounting and pushing commodities. If Alcoa beats the market, cool, but it's still just one company, I doubt it can spark the sentiment for overall increased corporate profits without getting help from the macro side, meaning very good jobs data, housing and so on. On the other hand, the current sentiment I would characterize as mildly fear- and doubtful, so a negative alcoa surprise could trigger a lot more than vice versa. So I would go for the downside, but remain very very careful. I have no individual companies anymore because everything seems to go the same direction these days anyways no matter how solid the underlying company is and only play with index options.

Jul 06 07:10 PM

[Fighting Yoda:]

Yes earnings this will trigger market moves - if they are bad it would lead to major declines, if they are good it would be a holding pattern. So you can simply play the down side.

Jul 06 08:16 PM

[squark62:]

independent of head & shoulders, most indicators i watch point down. for one, the RSI of the S&P is around 43. second, SSO is over-leveraged compared to SDS. there needs to be more equilibration to bring the rates of change of these 2 ETF in line with each other. that equilibration took place from mar-9 to 6-16-09 and significantly overshoot to the upside in my opinion. i think there's longer way to go down that people realize before we would reach a meaningful bottom in the S&P 500.

Jul 06 10:56 PM

[Bob Shreve:]

Head and Shoulders was a good dandruff shampoo -- is it really a good stock indicator?

Jul 07 12:15 AM