S&P 500 Snaps its Neck(line), but Bounce Makes Things Tricky
- ‘Head-and-shoulders’ triggers, but bounce makes things tricky
- Trend off 4/4 high remains lower, and so does our bias below top-side parallel and 2069
- Taking it one day at a time until a clearer path presents itself
Yesterday, equity markets saw some pretty good selling pressure, causing the S&P 500 to notch its worst day in a month. The downdraft triggered the ‘head-and-shoulders’ pattern we have been discussing the past couple of days by breaking ‘neck-line’ support at 2042. The break also pushed the S&P below lower parallel support running back a couple of weeks.
However, since the late US cash session the futures have bounced with force from a lower parallel created off the 4/4 high. This has the S&P currently back above the ‘neck-line’ and previously broken lower rising channel line. The current price action is a good example of why it has been noted on several occasions that the preference on this end is to keep hold-times on trades to very short durations – no longer than a day, maybe two. Markets are indecisive, but still tradeable if nimble.
The H&S formation cleanly triggered, but now it is back above key levels. So what do we do now? Well, while things are getting a bit sloppy for the topping formation identified, a downward channel consisting of lower highs and lower lows is still in place, which is short-term bearish. This could eventually turn out to be a broader ‘bull-flag’ pattern, but will require a bit more work to create, and that work will need to come in the form of working its way side-ways to lower before higher.
As long as the S&P stays below the lower parallel (2060ish) and the Wednesday high at 2069 we remain in the bear-camp. A strong push back under 2042 further strengthens this view. Not all will have been lost on the H&S top. Sometimes these things don't take the most desirable path.
On further weakness below 2042 we look for a challenge of yesterday’s low at 2033, then the lower parallel and 3/29 pivot a shade under 2030. Other levels to watch should those break include 2021ish and then the H&S measured move target of approximately 2005, which is determined by subtracting the height of the pattern from the ‘neck-line’. A move to 2005 would put the S&P back into a zone of significant support (1990/2010).
As previously expressed, taking it one day at a time until the market becomes clearer. For now, we will continue to operate from the short-side, but will nimbly change course should price action dictate.
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---Written by Paul Robinson, Market Analyst
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.