When S&Ps are making new highs and all resistance levels, to speak of, have been broken to the upside, we need to look back. In this case, back to a time that many market participants have already forgotten:
Raise your hand if you remember this chart.
This was the transition period from Bull to Bear Market back in 2007-2008. The topping action took over a year to develop and provides further evidence that tops are not events but more of a process that takes time.
To refresh your memory, this historic peak in the stock market was set up by a very common and well-known pattern. The infamous Head & Shoulders Top was the end to a solid bull market off the tech bubble lows 5 years prior. The left shoulder is the top from summer 2007, Head in the Fall of that year, and then a small, weak, half-ass attempt at a right shoulder just before 2008. When that neckline broke, that was all she wrote. A retest of that breakdown level came in May of 2008, which obviously failed and set up one of the most horrific stock market crashes of our lives.
But what we want to take from this chart are the levels of the neckline. As usual, the stock market isn’t perfect, and there is not one exact number for neckline support/resistance. In reality, it wound up being more of a range – about 1440-1460.
Well here we are, 5 years after the first run into the resistance levels that would eventually be the neckline for the Head & Shoulders Top. My opinion is that since there was so much commotion at these levels (resistance, then support, then support again, then a key breakdown, then resistance again), I have to believe there’s gonna be trouble here for the S&Ps.
Below is a continuation of that first chart with the all-important neckline extended through today:
As bullish as I’ve been since the Fall, I cannot imagine that the S&P500 is going to continue higher without at least acknowledging this key level of resistance. 1440-1460 is definitely going to be an area where I would anticipate some trouble. I don’t think that this alone will change the big picture, and bull market. But I would not be doing my job as a risk manager if I didn’t expect to see at least some selling here.
My guess is that during the correction that begins around this area, the media will blame a combination of Earnings disappointments and European uncertainty (but those are only guesses). We may even have something new to “worry about”, just to keep the printing presses going and televeision commercials pumping.
But in reality, I think it will just be a recognition of formerly important levels. That’s all. When the time comes, we’ll throw up some Fibonacci levels to see where the selling could potentially stop once the correction begins. But let’s keep in mind that last year’s summer highs were recently exceeded and could be a key level of support down the road.
For now, I think the market rally continues higher, but this neckline is definitely going to come into play….
Tags: $SPX $SPY $ES_F