By Jim Stanton
The big question on many investors’ minds is: Have the indexes put in a meaningful, longer-term low, or are they merely undergoing a bear market rally?
Over the past couple of months we’ve heard numerous analysts proclaim that they’ve seen a “V-shaped” or “L-shaped” bottom, while others say we’ll test the March lows again.
My own analysis doesn’t rule out a test, or break, of the March lows. But one other possibility that I haven’t heard mentioned much is that the S&P 500 (and its ETF - the SPDR Trust (AMEX: SPY) is tracing out a reverse, head and shoulders pattern.
This would be a bullish scenario - and the daily chart below shows that the S&P 500 is setting up what could be a reverse head and shoulders bottom.
Breaking Down The Market’s “Reverse Head-And-Shoulders”
The S&P 500 made its initial low in late November around 740 before rallying up to the 940 area in early January. If this a reverse head and shoulders pattern, that move would be the left “shoulder.”
The index then dropped down to new lows in March, which could be construed as the “head” of the pattern.
After that, the index rallied back up very close to the January highs - and if the market sells off from here, we can label the January and May highs as the “neckline” of the pattern.
If a reverse head and shoulders is in fact what is developing, the right “shoulder” could drop down to anywhere between 850 and 740 before reversing back to the upside.
With two of the three parameters in place, a reverse head and shoulders pattern appears to be a possibility. So if the S&P 500 does drop down to 850 or lower, and then reverses back up before making new lows, a close above the neckline would be bullish over the longer-term.
However, if the S&P makes new highs shortly, and can close above the 200-day moving average a couple of times, that should also be bullish, as weekly buy signals could be triggered shortly thereafter.
Disclosure: No positions