There has been a lot of commentary in the last few days about the alleged appearance of a developing Head and Shoulders pattern on the S&P 500 Index, for example this piece. Here's another perspective on key levels on the S&P 500 cash index and, to declare my interest up front, I take a rather agnostic position with respect to H&S patterns. Even though the pattern template seems to be less easily discernible than is often suggested in TA text books, there does seem a good case for using the notion that the size of a correction will often equal the distance from a multi-period top to a key support line (could be called a neckline).

The critical support level from Feb 5, 2010 on the S&P 500 was actually 1044.5 - the intraday low. Since then we have always managed to close above this level, even during this recent correction. So we have about 175 points head room up to the April top and if we subtract 175 from 1045 it puts us at 870 which is probably the most important level for the whole period from the March 2009 low onwards and the level which was keenly tested in early July 2009.

It would seem to me that whether or not a right shoulder forms (which could take us back to 1130/50 or thereabouts) or, whether another sovereign debt/FX crisis takes us below 1040 on a closing basis, in a shorter time frame and more abrupt fashion, there is a growing probability that we will need to re-visit the 870 level again in the next 12 months.

Also 875 is the 62% retracement of the swing low of 666 and the high of 1220.

The fundamental story behind such a technically driven move (should it occur) would most likely coincide with a lot of talk about a global double dip and the mistakes being made by too many policy makers of bringing in fiscal austerity packages too soon.

Saving the most ominous technical signal to last, on May 25th (i.e. last Tuesday) the intraday low breached the Feb 5 low mentioned above and actually reached down to 1040 (the lowest level since November 2009).

In a pre HFT market environment, it strikes me that this breach could well act as a more immediate anxiety point that would need to…

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