There has been some talk recently about a head & shoulders pattern developing in the S&P 500 daily chart. Lets start by say there is not a confirmed head & shoulders pattern in the chart, but there is a potential H&S reversal pattern present. Bias will have traders seeing things that aren’t there so we have to be careful. If the market stretches out laterally here, or if it makes a run at 950 the H&S pattern idea will start to fall apart and the action will look like a simple bullish consolidation. The S&P needs to break through the 885 level and break the neckline to confirm the pattern. The measured move targets 827, but the 813 level is a 50% retracement of the March rally and seems like a natural level for a correction. We’re bullish on the market, but a 50% retracement is a normal and healthy pullback in the larger scheme.

S&P 500 Daily Head & Shoulders

Here’s the inverted H&S bottom scenario we laid out in May. We expected a pullback to the 750 level at that time which would have matched up with the October low and laid the groundwork for a bullish reversal pattern. The market was a lot stronger than we expected and held on in a surprising manner. Traders with a bearish bias here should keep in mind the market has already shown impressive strength. We believe this resiliency is a distortion caused by the massive liquidity injection made by the Fed.

S&P 500 H&S Bottom