The chart of the S&P 500, which flashed a scary death cross last week, now appears to be forming a new pattern that could be just as ominous.
The S&P has been forming a “head-and-shoulders” pattern, where the right shoulder seems to be building in the index’s recent monthly range of between 2,600 and 2,800. The top of the ‘head’ was when the S&P 500 hit 2,940 in late September. The neckline has been forming in the 2,600 area.
On Monday, the S&P 500 briefly broke below the range in early morning selling, but the market reversed course, and the S&P rose back above the key 2,603 level. That is also the same level that was the low in October.
Traders sold into an early rally Tuesday, with banks tumbling and tech weakening. The S&P closed Tuesday at 2,636, off less than a point.
Source: T3Live.com
“If we do break 2,600 later this week, the next time it could ignite a move that could trigger the head and shoulders pattern, which then gives a measured move down to 2,300,” said Scott Redler, partner with T3Live.com.
“I actually thought it would happen in 2019. I thought it would hold up a little better due to the December seasonality, and that it seemed like it might wait. But this could take any Santa Claus rally off the table,,” he said.
Redler said the “head-and-shoulders” pattern is a topping, or distribution pattern. The head represents a rounding top and the neckline serves as support. The S&P attempted to form this pattern several times over the last few years, but the support held at the neckline.
“Now that it’s the ninth year of a bull run and stocks are technically breaking down, and many stocks are in a bear market pattern, maybe it ignites the move to the downside this time,” said Redler.
The S&P 500 formed the so-called death cross on Friday, where its average price of the last 50 days fell below its 200-day moving average. This could signal a change in long-term trend, according to technical analysts.
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