Woohoo! I’m done my finals!! Again I apologize for the lack of articles in the past weeks, but I hope you enjoyed Dylan and Marlin’s posts. You will be seeing more posts from them in the future, but as of today you will be seeing much more regular articles from me. So please come by more often and leave a comment or two. If you like or agree with an article let me know and if you disagree with an article, tell me why

So correct me if I’m wrong, but it looks like we have an inverted head and shoulders pattern in a downtrend. This indicator is usually the first sign that a bearish trend is about to end. Typically, a short-term uptrend will follow after the price breaks the neckline looking something like this:

Now compare the above chart with the latest S&P500 chart. This is what you’re looking for:

The head and shoulders bottom or inverted head and shoulders must follow an extended price decline or downtrend. Price makes a low which forms the left shoulder and bounces to a minor high. Price then achieves a major low which forms the head, then bounces to form one more minor high. Price declines again but does not penetrate the major low before it bounces, forming the right shoulder. The minor highs are connected with a trend line which may slope upward, and this trend line is called the neckline. An upside breakout from the neckline is the buy signal for this pattern, which confirms that a lasting low has been made and that a reversal of the downtrend has been made.

Do you see a resemblance? I think we see a bullish trend within a bear market. Further, there is a higher right shoulder, this is an even stronger signal. Some people may draw the head line or neckline where resistance is. I however drew the neckline a little bit more accurately. After breaking 1366, a short-term uptrend should have followed which we got. Now we have another obstacle to pass…the 1400 resistance. We tried breaking this resistance last Friday (April 19, 2008) but failed. After failing, a pullback was needed before testing this mark again. We made progress this week but unfortunately we’re sitting right at resistance again.With news that tax rebates are going out Monday, we have a much better chance of breaking this level than last week. This stimulus plan will begin earlier than previously announced, and “should help Americans cope with rising gasoline and food prices, as well as aid a slumping economy”. But will these rebates actually “trigger a spending spree” (YAHOO!)? I highly doubt it! This along with the inverted head and shoulders pattern should push the S&P higher, closer to the 1440 mark (200day moving average level), but anything could happen when and if we get there.

Richard
richard[at]hedgeagainstspeculation.com