Tuesday, October 19, 2010

S&P 500 Index Forms Inverted Head & Shoulders Stock Chart Pattern

Over time fundamental factors will determine the longer term direction of stocks and the stock market. On a short term basis though, technical factors can lead to self fulfilling outcomes as enough investors do trade on technical market data.

The recent price action of the market has resulted in the S&P 500 index's chart pattern to resemble an inverted head and shoulders. This pattern tends to be a bullish indicator for future market advances. With the inverted pattern though, volume tends to be a more critical element in determining whether the pattern's anticipated outcome is achieved. As the below chart does show, both the left and right shoulder have been formed on each side of the head pattern. What appears to be missing is the volume on the right shoulder formation.

From The Blog of HORAN Capital Advisors
Upside resistance for the market is around 1,218. Additionally, the 50 day moving average is getting close to crossing the 200 day moving average from below. This cross is know as the golden cross and can be an indication of further market advances as well. Investors should keep in mind that the golden cross and death cross indicators have mixed predictive results.

Lastly, we are approaching the third term of the presidential cycle and the third year of the cycle tends to be one in which the market has its best performance. We highlighted some of the election data in our third quarter newsletter. In addition to the election cycle, we are entering the buy period in the "sell in May and Go Away" seasonal indicator. This indicator suggests selling stocks in May and re-buying them in November. Below is a chart from an earlier post I wrote at the beginning of May this year, The Beginning of May and the Market.

From The Blog of HORAN Capital Advisors
Given the market's strong advance since the end of August a little market consolidation, like experienced today, is to be expected.

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