Possible Head and Shoulders on SPX

An Indicator Worth Watching

By Bryan Bottarelli
Tuesday, June 30, 2009 3:32 PM EDT
Tue, 30 Jun 2009 19:32:00 GMT

Dear Bottarelli Research Member,

As we begin the final 30 minutes of today’s trading, I’d like to highlight a possible Head and Shoulders pattern that’s now forming on the S&P 500.

As you probably know, the head-and-shoulders pattern is believed to be one of the most reliable trend-reversal patterns. It occurs when prices rise to a peak, and subsequently decline. Then, prices rise above the former peak, and once again decline. And finally, prices rises yet again, but not to the second peak, and then decline once more. The first and third peaks form the shoulders, while the second peak forms the head. See below:

SPX

Now, in order to have confirmation of this formation, the SPX must fall below the neckline, which is support right around the 900 level. If this neckline breaks on heavy volume, we’ll know to enter into an aggressive short position.

In terms of a downside target, a reliable calculation entails measuring the price variance between the peak of the head and the neckline. In the case of the SPX, the peak of the head is formed at 956 and the neckline was established right around 900. That’s a difference of 56 points. Therefore, the downside price target is calculated by subtracting the price at which the pattern breaks the neckline (SPX 900) by the difference between the head and the neckline (56). Based on this example, the new SPX price objective upon confirmation of a head-and-shoulders formation is SPX 844.

I suspect that this week’s trading will all come on light volume, so we might have to wait until next week for this formation to reveal itself completely. But nevertheless, it’s certainly something to keep a very close eye on. As always, I’ll keep you fully informed on any new developments. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

© 2012 CSR Group, LLC. All rights reserved. Published in USA.

Information, opinion, research, and commentary contained herein is obtained from sources believed to be reliable; their reliability, however, cannot be guaranteed. The maxim of Caveat Emptor applies — let the buyer beware. Bottarelli Research does not provide individual investment advice, act as an investment advisor, or individually advocate the purchase or sale of any security or investment.

Investments recommended in this service should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Bottarelli Research reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscriber’s initials will be used unless express written permission has been granted to the contrary.

CSR Group, LLC expressly forbids its writers from having a financial interest in any security recommended to readers. Furthermore, all employees and agents of CSR Group, LLC and its affiliate companies must wait 24 hours before following a published recommendation.

Bottarelli Research alerts contain time-sensitive information, and are published and distributed to members with urgency. Because of this, not all published materials can be adequately proofread, and an occasional spelling or grammar error may exist.


Other Options Alerts From June 2009