S&P 500 (SPX) — Some analysts are now saying that yesterday’s breakout is an “inverse head-and-shoulders” formation with a target of 1,233.

The requirements for an inverse head-and-shoulders, taken from “The Technical Analysis of Stock Trends” by Edward and Magee, are as follows:

1. The left shoulder is made with more or less extensive downside volume. 

2. The head is the second decline that carries lower than the left shoulder with somewhat lower volume than the left shoulder.

3. The right shoulder is the third decline and with decidedly lower volume than either the left shoulder or the head.

4. Finally, an advance on which activity (volume) increases notably, which pushes up through the neckline and closes above it by an amount approximately equivalent to 3% of the price, with a conspicuous burst of activity attending this penetration. This is the “confirmation” or “breakout.”

There are currently several requirements that have not yet been attained by the current “breakout,” so we are not able to identify yesterday’s rally as a “reverse head-and-shoulders.” I want to bypass the question of volume on the left shoulder and head since volume throughout the summer has been lacking. 

The first requirement missing is volume on the breakout, which yesterday was a mere 955 million shares on the NYSE. Second, the break has yet to reach the 3% advance above the neckline needed for a confirmation. That number is 1,163 on the S&P and a drive to the middle of next resistance zone now at 1,153 to 1,170.

There will be much discussion of the current breakout, but for now the pop higher merely changes the direction of the intermediate-term trend to up from sideways. The long-term trend is still down, so advances of this nature should be treated as rallies in a bear market until proven otherwise.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.

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