Domzee

We always have our eyes open for the appearance of Candlestick reversal signals, because we have learned that they very often do possess price-predictive capability.  Our interest is doubly piqued when a classic Candlestick reversal pattern becomes part of an unfolding classic “Western” reversal pattern.

That is exactly what is occurring in the S&P 500 Index now:  We first identified the emergence of a possible “Western” Head & Shoulders Top a few days ago.  On July 1, the S&P’s price bar was a classically-bearish Candlestick “Shooting Star,” which has been followed up today, July 2, by a tall black Candle and a strong price selloff.

The really interesting part now is that today’s price action has gone a very long way toward completing the “Right Shoulder” of the Head & Shoulders Top pattern, and prices closed today within about seven points of crossing the “Neckline” of the pattern.

When and if that breach happens, we would look for prices to re-test the Neckline; and if they should be repelled downward when approaching the Neckline from below in such a re-test, we would then look toward a downside price target of about 814.

Here is the calculation:  The top of the Head is 956.23, reached on June 11.  A vertical line drawn through that date crosses the Neckline at about 885.  The difference between 956.23 and 885 is 71, rounded.  Starting at the point of crossing, an extension of prices by 71 downward from 885 gives us a target of 814.

We will be watching to see whether this Head & Shoulders Top completes in classic fashion.  If it should do so, we can reasonably expect that S&P 500 prices will decline toward 814.

William Kurtz       July 2, 2009

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