Saturday, July 10, 2010

Mr. Market puts on his Angry Eyes?

Mr. Market (the S&P 500 index) may have put on his angry eyes last week when two bearish long term technical indicators occurred. The first breached indicator was the death cross (Uh yeah, I know that doesn't sound too good does it). This is when the 50 day simple moving average crosses below the 200 day simple moving average, which has received a lot of coverage in the media and by financial experts recently. If you haven't heard about it yet I recommend you read Jim Jubak's post: 'This stock market bounce has brought us the luxury of uncertainty'.

The second bearish technical indicator which hasn't received as much attention is the Head and Shoulders Top. The Head and Shoulders Top is one of the most common, and reliable, forms of reversal pattern. The shape consists of a left shoulder (lower top) followed by a head (higher top) and then a right shoulder (second lower top). The indicator is confirmed or should I say activated when the market closes below the neckline of the shoulders. In the chart below you will see that the S&P 500 has charted out a head and shoulders top pattern with a neckline support level at 1040. Last week the neckline was breached but then the market quickly bounced back up above the 1040 level. Yes the neckline was in fact breached, but instead of just retesting by coming back up to 1040 (to new resistance which is expected) the market has broken back through above 1040. So where are we now? Good question!

In my humble opinion (and I'm by no means a technical analysis wizard) the verdict is still out on our current head and shoulders top technical indicator. My best advice would be to tread with caution and continue to watch for further evidence of a reversal. It's likely that we will find out whether or not the angry eyes are here to stay sometime this week from the Q3 guidance given in the upcoming earning reports.

No comments:

Post a Comment