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In past commentaries, I've discussed potentially bearish macro-chart divergences that are in place for some global risk-asset markets. However, in this article, I'd like to present a recent development that has potentially bullish implications for U.S. stocks in the nearer term. Specifically, during the last week, the S&P 500 Index may have formed the right shoulder of an inverted head-and-shoulders pattern. Take a look at the chart below.
This chart is a close-up version of one that I have been presenting in a series about S&P 500 parameters. I recently showed how minor resistance at 1420 had been breached, setting up a potential retest of the 1475 resistance area. Notice in this chart that a potential inverted head-and-shoulders pattern has developed. The head, shoulders and neckline are shown as white horizontal lines.
The good thing about this pattern is that once again the parameters are very well defined and offer a good risk-reward ratio. Neckline support is in the 1435-1440 area, while further support lies beneath at the 1420 support area. We should know in short order if the pattern is legit, or if it fails.
I've included three other charts as well. The first is a current look at the inverted head-and-shoulders pattern present on the NASDAQ 100 chart, a pattern I previously presented in NASDAQ 100 Macro Chart Observations. The pattern continues to develop for now.
The second is an update of the XRT-XLP ratio spread. You can see how trend-channel support has held once again, at least for now. If this support holds, that would be yet another feather in the S&P's cap.
The final chart is the Russell 2000 Index. The white horizontal line represents the last market resistance – the market's all-time high.
I continue to have concerns about macro-chart divergences that I have previously mentioned, and which are still present. However, the S&P 500 may be placing an inverted head-and-shoulders pattern that would suggest higher prices. I'm somewhat torn about which should be given greater weight. The good thing is – the S&P's parameters continue to be well-defined.
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