The SPX could be in the process of making a Head and Shoulders peak. This is a bearish pattern and one that many technicians say could lead to much lower prices should it happen.
As you can see below, it is trying to form a right shoulder right now. Should the shares bounce a little more, then break beneath its neckline, it could signal a big drop is coming. Going from the head near 1597, to the neckline down near 1538, this comes out to 59 points. So a break of the neckline would suggest a target move down of 59 points to 1479. From last night’s close this is about 5.3% lower.
One thing we’ve noticed over the years is how quickly the crowd (or media) are to pick up the bearish chart formations. On the other hand, nearly totally ignore the bullish formations. Back in 2010, there was a very well broadcast bearish head and shoulders pattern that nailed the lows for the year in 2010. So by no means do these always work.
Anecdotally, we find it extremely bullish that only the bearish technical patterns seem to get picked up. While bullish patterns are nearly totally ignored. The SPX formed a nice inverted head and shoulders pattern late last year and no one talked about it. Instead, all we heard or read about was how bad Fiscal Cliff was going to be for everyone. Yeah, maybe not.
Now this time we have talk of a bearish pattern before it is even completed! Now the current pattern very well could play out perfectly for the bears, but be listening closely to how many are talking about it. If nearly everyone sees it, I do think that negates how effective it might be.