Market Head & Shoulders

The market, here represented by the Standard & Poor's 500 large Cap Index (SPX), seems making a head-and-shoulders topping pattern. Yesterday we violated the neckline intraday, but closed above it, officially not triggering or confirming the pattern. The neckline forms a significant resistance level, so penetrating it will not be easy. Should it happen, it marks the end of the first move up from the bear market bottom in early March, and the start of the first correction wave of the bull market.

Note the MACD shows a divergence between the left shoulder (LS) and the head (H). A divergence is when an indicator moves one direction while price continues its previous direction, and normal forecasts a pending price reversal. MACD continues down with the recent formation of the probable right shoulder (RS), telegraphing a probable violation of the neckline and commencement of the correction. A divergence in Stochastics confirms MACD.

This interpretation provides an opportunity to position in bear-market ETFs such as TZA, BGZ, FAZ, ERY, QID...
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07/07/09;16:01 EDT: SPX broke through the neckline confirming the head-and-shoulders pattern. Target low for this downward excursion should be in the 820s. It may well retest the neckline from the bottom side before moving to the 820s, which will give one an entry opportunity into TZA, ERY, etc.