First Support Level Re-Tested

Last week’s summary stated: “SPX appears to have completed the first phase of its correction on Friday by reaching a P&F phase target as well as a strong support level.  This price area also corresponded to a normal downside projection for the H&S pattern which formed as a top.  It should bring about a rally which may be strong enough to carry it back to 2075 — a 50% retracement of the move down from 2111.”  

This is pretty much what happened last week when the index filled its base projection of 2084, reversed, and started a correction which, by the end of the week, brought it within four points of where the rally started.  But it does not look as if we are finished declining over the short term.   

And then: “This retracement would enhance the possibility that it could form a right shoulder of an even larger H&S top which, when broken, would leave no doubt that we have started a major correction.”  

The SPX price action is becoming interesting, since I also mentioned that we might be in the process of forming the right shoulder of a larger H&S pattern whose neckline is at 2042, and if we do continue to decline for another ten or twenty points, it will make this potential formation even more realistic.   Whether or not it turns out to be such a pattern (if the 2043 support level is broken) it will increase our bearish stance — especially if this is followed by a move below the next support at 2020.

In fact, as we will see later, three in our group of leaders have already broken below a level comparable to the SPX 2043, with the TRAN “canary” being the latest by making a new low on Friday.  It would be surprising if SPX and the other two do not follow suit next week.  

SPX Chart Analysis

Daily chart (This chart, and others below, are courtesy of QCharts.com.)

I have sacrificed showing the rally low (1810) in order to provide more clarity for the top pattern which may be evolving as a H&S formation.  I have drawn the presumed neckline with a heavy red line across the two lows.  The parallel to the neckline drawn from the left shoulder is pretty much in alignment with the neckline of the smaller H&S pattern, and its extension is where the rally from 2040 stopped, giving the entire formation a symmetrical pattern.  However, in order to confirm it as a H&S, the index will have to plunge below the neckline (perhaps to the bottom dashed trend line of the large rising channel or lower), rally to the neckline, and then continue the downtrend.  If my intuition serves me right, next week could accomplish a good part of that confirmation process.