After last week's crazy ride with Obamacare and Monday's nasty open, the inverse head and shoulders pattern I discussed last Sunday is still in play. My two main arguments of why we are going higher are that the majority of bad news is absorbed in the markets and that a lot of charts are showing there is more upside to come. However, I think we are one to two days away from a pull-back based on some sentiment indicators; I think we will be just putting in a temporary top. But the amount of damage done with a possible pull-back will be key to this inverse head and shoulders pattern playing out, I expect it to be light pullback.
The most important thing to take from Friday's huge gains is that we have yet to top the highs of June. The highs of June are at a little over 1363. We need to break June's high or otherwise face a nasty double top that can roll over and test June's low. I don't think this is likely though. The Fibonacci 61.8% Retracement Line shown in the 2nd chart below is very important. The best case scenario for the inverse head and shoulder pattern playing out is if we break the Fibonacci 61.8% Retracement Line and it acts as support during a possible pull-back. One major resistance that the SP 500 has broken through is the 100 day moving average shown here: Daily SP 500 Stock Chart.
The chart below shows the inverse head and shoulder pattern is still intact:
Below is the 60 Minute SP 500 Stock Chart with Fibonacci Retracement Lines. Breaking the 61.8% Fibonacci Line is key to this rally.
The sentiment indicators chart below shows why I think the market is near a short-term top. The sentiment indicators are reliable for detecting temporary tops and bottoms in the market. For those interested, enlarge the chart for more of an explanation and some examples. When using the $VIX and $CPC I am interested in looking at the rate of change day to day, and not the actual values of these indicators. Right now they are indicating oversold values based on the bollinger bands I put on them, and a pullback looks due within the next day or two.
We are still overbought in the McClellan Oscillator, which is bullish intermediate term. In the McClellan Stock Chart below, pay attention to the red circle drawn in March. After becoming overbought, the indicator dipped below 0 for a while, then made one last gasp above 0 (circled in red). Dipping below 0 after being overbought and briefly going above 0 usually marks the top and the highest high. This indicator is telling us there is still enough liquidity in the market to push prices higher, and why I think the inverse head and shoulder pattern in the SP 500 will play out. We have yet to pull back below 0, so we have plenty of time before any topping behavior starts.
Check out my other weekend post where I review Apple's stock charts in depth: Apple's Stock Charts Dissected: Bullish Or Bearish?