Don't Ignore This Chart!

Did We Just Complete a H&S Top In $SPX?


It seems I did not have to look very far to find today's DITC entry...

The S&P 500 ($SPX) provides enough ammunition to get excited - or maybe worried is a better word - and not ignore the price action that is unfolding at the moment.

Looking at the 6-month chart of the index, the contours of a head-and-shoulders top formation can be distinguished. Is it a perfect H&S? Probably not. Does it have enough validity to not be ignored? Definitely.

The rally out of the December low ended at the high on the 1st of May, when a more serious decline took the S&P back to 2800.

The first indication of weakness emerged when the next rally was unable to push back to the previous high, with a new high instead being put into place near 2900, significantly lower than the high at 2954 on 1 May.

From that lower high, the market started to decline again, resulting in a very weak day on 28 May with a low dangerously close to the slightly up-sloping support line that connects the arm-pits of the H&S formation. Yesterday's gap down definitely broke that level and completed the formation. Whether you subscribe to the H&S formation or not, it definitely is a weak move, kicking off a new series of lower highs and lower lows.

Building on the premise of an H&S being put into place, we can calculate the expected price target for the ensuing move by projecting the height of the pattern down from the break-level. This leads to an expected decline towards 2675 (roughly 5%). The spike in volume on the last two (weak) days support the case for a completed H&S.

5% is not a massive decline (yet) but, in the bigger scheme of things, it looks as if we are putting a fairly major peak into place - and things can easily go from weak to worse. In any case, warning lights are flashing!!

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Julius de Kempenaer
Senior Technical Analyst,
Creator, Relative Rotation Graphs
Founder, RRG Research

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Julius de Kempenaer
About the author: is the creator of Relative Rotation Graphs™. This unique method to visualize relative strength within a universe of securities was first launched on Bloomberg professional services terminals in January of 2011 and was released on in July of 2014. After graduating from the Dutch Royal Military Academy, Julius served in the Dutch Air Force in multiple officer ranks. He retired from the military as a captain in 1990 to enter the financial industry as a portfolio manager for Equity & Law (now part of AXA Investment Managers). Learn More
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