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S&P 500 Head and Shoulders Top Confirmed

There’s no denying that we’ve seen signs of distribution, from key stocks like AAPL and TSLA breaking down to breadth conditions that have become less…

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3 weeks ago

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There's no denying that we've seen signs of distribution, from key stocks like AAPL and TSLA breaking down to breadth conditions that have become less bullish by the week. 

This week, we confirmed a head and shoulders topping pattern for the S&P 500, giving a bearish tone to the major equity averages going into next week. While the selloff into the end of this week was certainly related to the Fed meeting and Powell's press conference on Wednesday, but the signs of deterioration have been building for the last couple weeks.

Today we'll break down the head and shoulders topping pattern on the SPX chart, outline the three phases of price patterns in general, and identify some potential downside targets for the S&P 500.

The Head and Shoulders Pattern Defined

A number of technical analysis disciplines, from Elliott Wave to Dow Theory, use an analysis of highs and lows to define trends and identify potential reversals. Charles Dow's basic definition was that an uptrend is comprised of higher highs and higher lows. Once that pattern is broken, then the uptrend may be in jeopardy.

Robert Edwards and John Magee, in their classic book Technical Analysis of Stock Trends (one of the most important books on our Recommended Reading List), described the head and shoulders top as an important pattern representing a "change of character" on the chart.

I like to think of the head and shoulders top as a failed attempt to make another new high. The uptrend phase keeps making higher highs and higher lows, until finally there's a failed attempt to push to a new price high. This often indicates an exhaustion of buyers, or sellers beginning to unload shares into the market, or both. For whatever reason, the price no longer fits the description of an uptrend.

I've found that novice technical analysts tend to label price patterns like the head and shoulders way too early, before the pattern has completed. This is why I've come to describe the three phases of price patterns. By waiting for these three steps, you can minimize false signals and whipsaws.

The Three Phases of Price Patterns

All price patterns can be broken down into three specific phases: the setup, the trigger, and the confirmation. Let's review these three steps using an update S&P 500 chart that includes the crucial neckline.

The setup is when the pattern starts to become recognizable. You can see the lower high (the right shoulder in a head and shoulders top), it sure looks like a head and shoulders pattern, and you're ready to label it as such.

But you have to remember that until the price breaks the neckline of the pattern (dashed red line above), you can only label it as a "potential" head and shoulders pattern. The trigger is the point at which you can remove the "potential" label, and correctly identify the pattern as completed.

On the S&P 500, that meant we needed a break below the neckline which was around 4350. Then and only then can we identify likely downside targets based on the height of the pattern.

The final phase is the confirmation, which involves some further move in the direction of the breakdown. This is a crucial step, because I've often found that a chart will break below a key level of support, only to reverse course and move right back in the previous direction. This sort of whipsaw move can be frustrating for traders, as what appears to be a clear signal never materializes into anything further.

There are a couple different ways to define the follow-through, but I tend to keep it very straightforward. I look for at least one more bar moving in the direction of the breakdown as a validation that the pattern has been completed. 

We saw the initial breakdown of the pattern on Thursday, and then Friday's session pushed even further down below the neckline. In my opinion, that is enough to declare this as a confirmed head and shoulders top for the S&P 500 index.

Downside Objectives for SPX

Now that we've confirmed a breakdown, what's next for the major equity averages? We need to remember that short-term patterns yield short-term objectives, and long-term patterns yield long-term objectives. So while this breakdown seems like a climactically negative bear move for the SPX, it may just confirm that the current corrective move has a bit further to go.

The classic measurement technique for a head and shoulders pattern is to take the height of the pattern from the head to the neckline, and then project a similar move down after the break.

This particular pattern consisted of about a 6% move from the July peak to the neckline, which means that a similar downside move would result in a minimum downside objective around 4080. 

It's worth noting that I'm using percentages here because I almost always use log scale charts, where the Y-axis is defined by percentages instead of dollar values. The other way to measure the downside objective is to just use the dollar values on an arithmetic scale. It's about a 250-point range from the top of the head to the neckline, which would mean a downside objective around 4100. 

It's important to remember that these patterns do not occur in a vacuum! So other potential areas of support, including the 200-day moving average and major trendlines, are still very much in play. But one thing I've learned over the years is to follow the trend. And for now, the trend in the S&P 500 appears negative.


RR#6,

Dave

PS- Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.   Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

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Sam Bankman-Fried requests long-acting Adderall to focus during trial

Lawyers for the FTX founder have asked if he can take long-release ADHD medication as he’s been unable to properly concentrate during his trial.
…

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October 15, 2023

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Lawyers for the FTX founder have asked if he can take long-release ADHD medication as he’s been unable to properly concentrate during his trial.

FTX co-founder Sam Bankman-Fried has asked a United States judge for long-release Adderall, saying he’s finding it hard to concentrate properly during his criminal trial.

In an Oct. 15 letter to New York District Judge Lewis Kaplan, Bankman-Fried’s lawyers asked if Bankman-Fried could take a “12-hour extended-release 20mg dose of Adderall” before he’s transported to trial on Oct. 16.

The lawyers added that Bankman-Fried’s lack of the prescribed stimulant during trial hours means he’s “not been able to concentrate at the level he ordinarily would” and wouldn’t be able to “meaningfully participate” in presenting his defense.

The former FTX CEO has been “doing his best to remain focused during the trial” despite his lack of medication during trial hours, the letter added.

Even if Bankman-Fried takes the requested medication, there’s “no way of knowing at present whether the extended-release dose will be effective,” his lawyers said.

Related: Caroline Ellison wanted to step down but feared a bank run on FTX

They requested the court stop the trial for one day — on Tuesday, Oct. 17 — if Bankman-Fried was either unable to take the long-release dose or if the medication didn’t work so they could “find a solution that will work for the remainder of [the] trial.”

Alternatively, the lawyers requested that Judge Kaplan permit them to provide Bankman-Fried with his prescription of Adderall at the District Court during the trial.

The lawyers claimed they had attempted to solve the issue with the Bureau of Prisons, but had not received a response to “numerous emails and voice messages.”

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South Korean exchange Upbit gets initial license nod from Singapore

Upbit Singapore scored initial approval from the country’s central bank and financial regulator for a local crypto license.
The Singapore…

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2 hours ago

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October 15, 2023

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Upbit Singapore scored initial approval from the country’s central bank and financial regulator for a local crypto license.

The Singapore entity for Upbit, South Korea’s largest exchange by volume, has been given in-principal approval for a Major Payment Institution (MPI) license in Singapore.

On Oct. 16, Upbit Singapore said the Monetary Authority of Singapore (MAS) gave the in-principle license nod, allowing it to continue with digital payment token services to institutional investors while awaiting its full license.

Upbit Singapore founder and CEO Alex Kim said in a statement that the firm was founded in 2018 but called the recent approval a strategic milestone for it to deepen its local presence.

The Upbit Singapore team, pictured in the city’s downtown area. Source: Upbit Singapore

Azman Hamid, the firm’s compliance chief, said the approval reflects its commitment to building its businesses in Singapore. “We will contribute to further establish Singapore as the leading hub for the next generation of financial businesses,” he added.

Related: Su Zhu’s $36M Singapore mansion transformed into eco-farm post-3AC collapse

A potential full approval for Upbit would see the exchange join a total of 15 crypto firms with full MPI digital payment token serve licenses from MAS.

In October alone, the Singaporean entities for Coinbase, Ripple and Sygnum Bank all received license approvals from MAS — pushing the number of MAS-licensed digital payment token service firms to 15.

On Oct. 2,  Coinbase received full approval for its MPI license, with crypto trading firm GSR scoring in-principal approval for its MPI the same day. Swiss crypto bank subsidiary Sygnum Singapore scored its full MPI license a day later and Ripple received its full MPI on Oct. 4.

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Everyone Suddenly Hates U.S. T-Bonds: What that Means and Why It’s Important to Stocks and Everything Else

No One Seems to Want U.S. Treasury Bonds. Does This Sound Familiar?The slightly-hotter-than-predicted PPI and CPI numbers certainly put a temporary damper…

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October 15, 2023

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No One Seems to Want U.S. Treasury Bonds. Does This Sound Familiar?

The slightly-hotter-than-predicted PPI and CPI numbers certainly put a temporary damper on the recent short covering rally in stocks and bonds, raising investor fears about further interest rate increases. But, as I've noted recently, fear is often the prelude to a buying opportunity.

Such an opportunity may be developing in the U.S. Treasury Bond market and related interest-sensitive sectors of the stock market, such as homebuilders, real estate investment trusts, and select technology stocks. Still, the financial markets are reaching a decision point, as:

  • The market's breadth faces a test of support;
  • Oil prices rebound;
  • Bond yields trade at extraordinary levels; and
  • Geopolitical storms arise and escalate in multiple regions simultaneously.

There Are No Bond Bulls Left

Suddenly, no one wants to own U.S. Treasury Bonds. This bearish climate resembles the negative market sentiment we saw in crude oil back in May 2022, right before prices bottomed and rallied well into the early fall.

The headlines blame inflation for the rise in rates. But that's only part of the story, as the recent climb in yields, such as what we've seen in the U.S. Ten Year Treasury Note (TNX) over the past few weeks, is also due to what may be coordinated selling by China, Brazil, and Saudi Arabia, according to a report on the crypto site The Daily HODL, which noted the BRICS trio, combined, sold over $17 billion in U.S. Treasuries in the month of September alone.

From an investment standpoint, what's important is that this highly unusual trading pattern often precedes a trend reversal, which seems to be unfolding in fits and starts. Let's put this in perspective. TNX is now trading between two and three standard deviations above its 200-day moving average; an event which has exceeded normal long-term pricing expectations by a two to threefold margin.  

The key to this price chart is the area between the upper red and blue lines. Those are not moving averages; they are Bollinger Bands. The red line is three standard deviations above the 200-day moving average, while the blue line marks two standard deviations above the 200-day moving average. In other words, TNX is trading so far above what is considered "normal" that it's in uncharted territory, as defined by its standard deviations from the norm.

This is unsustainable, which means that when the reversion to the mean occurs, it should be quite sizeable. If there is no reversion to the mean, then the bond market is being redefined. I don't know what that means, but it doesn't sound like it would end well given its central role in global finance. The key is what happens at the 4.5% yield and the RSI 50 level. If yields fall below those two important benchmarks, it would signal that the bond market is getting back to a more normal trading pattern.

This rise in TNX has triggered an equally unsustainable rise in mortgage rates, which would be expected to lead to a crash in homebuilder stocks.

And yet the SPDR S&P Homebuilders ETF (XHB), although in a price correction, has not made a new low in response to the most recent spike in yields and mortgage rates. This is a bullish development for patient investors in homebuilder stocks. As long as XHB holds above the 200-day moving average, the homebuilder trade remains constructive.

Join the smart money at Joe Duarte in the Money Options.com, where I have just added five homebuilder stocks to the model portfolios. You can have a look at my latest recommendations FREE with a two-week trial subscription. And for frequent updates on real estate and housing, click here.

Picking Up the Pieces in the Oil Patch

The oil sector has quickly recovered after being sold aggressively in response to a 10/4/23 U.S. EIA report, which showed a larger-than-expected build in gasoline supplies. The market was well overbought ahead of that and was certainly ripe for such an event.

That said, the initially rapid decline in crude has slowed, partially due to the unfolding events in Israel and the potential for oil supply disruptions. All of which begs the question of what's next for the oil sector.

West Texas Intermediate (WTIC) has found support at the $85 area near its 50-day moving average and now looks to get back above $90. If successful, look for another attempt to move above $95.

The diversified Energy Sector SPDR ETF (XLE) has recovered, moving back above its 50-day moving average after last week's sudden selloff, which took it to a nearly oversold RSI reading. It does have a substantial amount of support in the combination of a huge block of Volume-by-Price (VBP bars), as well as the 200-day moving average as far down as $84. Accumulation/Distribution (ADI) and On Balance Volume (OBV) both turned up to confirm the return of positive money flows into the sector.

The Van Eck Oil Service Sector ETF (OIH) held up better than XLE on the selloff, but has not rebounded to the same degree. It has found support near its 50-day moving average, while ADI and OBV are turning up as well.

A more bullish pattern is visible in the iShares U.S. Oil & Gas Exploration ETF (IEO), which is nearing its recent highs and is on the verge of a breakout. I recently posted two new energy stock trades at Joe Duarte in the Money Options.com here.

Incidentally, if you're looking for the perfect price chart set up, check out my latest YD5 video, where I detail one of my favorite bullish setups. This video will prepare you for the next phase in the market.

The Market's Breadth Remains Above Support

The NYSE Advance Decline line (NYAD) remained below its 200-day moving average last week, but again remained above its recent March and May bottoms. A break below those levels would be very bearish. On the other hand, any further weakness in NYAD would lead to an oversold reading in the RSI, which could be the final washout of this correction.

The Nasdaq 100 Index (NDX) continues to test the 14500-15000 trading range area, with support at its 50-day moving average. ADI and OBV are both bouncing, which means short-covering (ADI) and buying (OBV) are occurring simultaneously.

The S&P 500 (SPX) is struggling between the 4250-4400 area, with the 50-day moving average providing overhead resistance. ADI is rising as short sellers cover their positions. If OBV turns up, it will be even more bullish.

VIX Remains Below 20

As it has done for the past few weeks during which the market has corrected, VIX has remained stubbornly below the 20 area despite multiple attempts to rise above this key chart point. A move above 20 would be very negative.

When the VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures. This raises the odds of higher stock prices.

To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I've made my NYAD-Complexity - Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.


Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe's exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

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