Dissecting the S&P 500 ‘Double Top’

Underlying support and a bullish structural setup should mitigate this dire formation

   

Given that exactly one week ago the S&P 500 failed to pierce through its September highs and has since retraced about 2.50%, some have wondered whether the charts are flashing a classic “double top” sell signal. At first glance such a formation seems plausible, but a bit more digging suggests a double top is not at hand.

First, let’s look at the charts:

1012 spxdaily Dissecting the S&P 500 'Double Top'

The double-top formation on the S&P 500 looks very real. In fact, the second try at the September highs even came short by a few points, a classic double-top move. However, the sharp rise in equity prices off the June lows has occurred in an orderly and very obvious uptrending channel. After the recent correction, we are now testing the lower end of this channel (around 1430), which may act as first support. Next support is 1420, which acted as resistance all year until the orchestrated central bank announcements of early September. Those are two important support levels worth watching.

The third support level comes in at 1395, which acted as support during the month of August and as a springboard to the September highs. Despite the fact that the double top looks legit, these three important support levels keep a real victory of the double-top formation at bay until all of them are broken. Additionally, from an even more near-term perspective, many of the momentum oscillators are quickly heading into oversold territory, indicating the downward acceleration may at least be slowing.

1012 SP400 Dissecting the S&P 500 'Double Top'

On the other hand, giving the S&P 500 double top more credibility is head-and-shoulders pattern in the S&P 400 mid-cap stock index, which if triggered would have an ultimate price target of another 5% lower from here. Granted, it would take a good chiropractor to get that head-and-shoulders formation to look right (it’s not a perfect setup).

If we now consider the structural backdrop of the current market, where major central banks around the globe are pulling on the same asset-inflating string, it is somewhat difficult to see equity prices not rising into year-end and surpassing the September highs. Furthermore, many fund managers are still underperforming the S&P 500 benchmark year to date, and with many books closing their year at the end of October, a performance-chasing rally into month-end is not unthinkable.


Article printed from InvestorPlace Media, http://investorplace.com/2012/10/dissecting-the-sp-500-double-top/.

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