Last week I showed the chart of the S&P and pointed out how we might be able to see a head-and-shoulders bottom on the chart if it pulled back from resistance. I indicated the resistance in the 1970 area, so it has already blown through there. But even so, a pullback from here would still form the right shoulder of a head-and-shoulders bottom.
However, that is not the pattern on peoples' minds this week. This week, the questions center around whether or not the much larger pattern can be a head-and-shoulders top. In case you don't know what they are talking about, I have indicated the pattern on the chart below for you.
The first thing to notice is that we can't even draw in a decent neckline. If I were to draw it in, it would be so starkly down-slanting as to make the pattern the farthest thing from a textbook head-and-shoulders top I can imagine. It is possible the pattern is a broadening top; but a broadening top has seven points and this one only has five.
Let me just stop for a minute and explain a broadening top. Essentially it is a series of higher highs and lower lows. Picture a megaphone with a rising line on top and a declining line on the bottom. That means it should have three higher highs and three lower lows. That gives us six points, with point number seven being the throwback rally. In this case we have the Left Shoulder (LS on the chart) as point 1, a higher high. We have the August sell off from there to the uptrend line as point 2. The Head (H on the chart) is point 3 and the October plunge is point 4, a lower low than the August decline. This recent rally back to the underside of the line would be point 5, thus falling two swings (points) shy of a proper broadening top.
In any event, I have always cared more about the indicators than I have about the pattern of the Index. If this pattern is still in place when we return to an intermediate-term overbought reading and there are negative divergences in place at that time, then I would think this is a topping pattern that is a cause for concern. But at this point the intermediate-term indicators are not overbought. The only intermediate indicator that is even remotely close to getting overbought is the Volume Indicator. When this gets to the upper 30s or lower 40s, it is oversold. When it gets over 55% it is overbought; it is currently 52% so it's the only intermediate term indicator I have that is heading toward an overbought reading.
As for Wednesday's market, I thought it acted as a market that is short-term overbought should act. It pulled back, but the underlying buying was still there. This is why I continue to expect short term pullbacks but then another rally after that.
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At the time of publication Helene Meisler had no positions in any of the securities mentioned.