June 30, 2010 S&P's Approach to 1040 May Be Bad Sign for Stocks

According to technical perpective the S&P 500's move below 1040 signals a technical "head and shoulders" pattern, a bearish sign for stocks. S&P is heading into that pattern, but it's not quite there yet. The signals appeared last week and suggest serious downside vulnerability.

The "head and shoulders" is a distribution pattern that historically leads to lower prices, said Scott Redler, a technical analyst with T3Live.com. The pattern started in mid-October, when the left shoulder rallied from a level of 1040 to a level of 1150 in January. At that point, the uptrend broke and created the 9 percent move lower into the Feb. 5 reversal, leading to a move to 1217.

That uptrend in turn broke May 4, creating the head. From May 4, the market declined back to 1040, which provided a bounce that became the neck line. The market's move to 1131, on June 21, built the top of the right shoulder. We believe the pattern was reached by the S&P 500 at the 1040 level Tuesday, which closed at 1041. Now we're back at the 1040 level which was the neckline, breached briefly today. The pattern is complete and once this 1040 is taken out with volume, the measured move of this pattern takes us down to 970, 940 area and these patterns resolve quickly."

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