Wednesday, June 24, 2015

S&P May be Signaling a 6% Correction

The S&P may be in the process of forming a bearish technical pattern that is favored by ‘western style’ technical analysis, but also has a place in candlestick technical analysis.  Specifically, we can visualize a bearish ‘head and shoulders’ (three Buddha) pattern in the forming.  Currently the right shoulder may be forming with today’s price action engulfing yesterday’s price action. 

Yesterday’s price action was indecisive and formed a bearish ‘spinning top’.  Today’s price action is helping to confirm the bearish implications of yesterday’s session by ‘engulfing’ and seemingly making ready to settle lower.  Because of this potential bearish technical development, we can look back over the last 3 months and map out a ‘head and shoulders’ pattern and construct a rough objective (roughly 2000) should the pattern become ‘elected’ by a break of the ‘neck line’.

Were ESU5 (Sep Emini S&P future) to reach 2000, it would represent a correction of 6% from the contract high.  Corrections since the start of the year have been limited to roughly 3%.  A 6% S&P correction would likely not undo any Fed ‘normalization’ plans, the beginning of which has been priced to occur after the September FOMC meeting. 

For the present, we view the recent advance from the latest test at 2060 support as lacking.  There has not been a new high reached and we suspect marginal longs will be anxious to flee to the sideline in any further weakness. 

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