Rebel Traders - Stock Market and Economic Analysis

The following chart details the Head and Shoulders pattern that has formed on the S&P 500.

What is a head and shoulders pattern? The head and shoulders pattern is generally regarded as a reversal pattern and it is most often seen in uptrends.

Eventually, the market begins to slow down and the forces of supply and demand are generally considered in balance.  Sellers come in at the highs (left shoulder) and the downside is probed (beginning neckline.)  Buyers soon return to the market and ultimately push through to new highs (head.) However, the new highs are quickly turned back and the downside is tested again (continuing neckline.)  Tentative buying re-emerges and the market rallies once more, but fails to take out the previous high. (This last top is considered the right shoulder.)  Buying dries up and the market tests the downside yet again.

When the index or stock breaks below the neckline it is then that the pattern is considered valid. And that is the case we presently have now on the S&P 500 cash index (SPX).

It is common for a head and shoulders pattern to be tested, that is the price moves up to the neckline once again and if the neckline holds as resistance then the neckline is considered valid and the market or stock will often head down to the eventual price target derived from this head and shoulders pattern.

With respect to the head and shoulders pattern currently in play on the S&P 500 the neck line rests in the region of  892.

Head and Shoulders Pattern S&P 500