Classic Head And Shoulders

The S&P recently displayed a classic Head and Shoulder pattern that we can use to determine a bottom to the markets recent decline.

In the graph below you’ll notice the head and shoulder with a neckline (support level of the two shoulders) at 1250 on the S&P. Once the S&P crashes through the neckline, then the H&S is officially formed. Before that, it could rise and create a different pattern.

To figure the bottom, you normally take the height of the pattern (from neckline to top of the head) and subtract that amount from the neckline to get the bottom.

Since the neckline is at 1250 and the top of the head is at 1370, that gives us a height of 120 points. So taking the neckline at 1250 and subtracting 120 will give us a bottom at 1130.

The S&P has played with this area on several occasions recently. Check out these days and the S&P lows on those days:
8/8 – 1119
8/9 – 1101 (the day I claimed we had bottomed)
8/10 – 1118
8/11 – 1121
8/18 – 1131

The S&P has been bouncing around a low of 1120 on average and today (8/18) it hit a low of 1131. If the S&P hits around 1120 again, that may be a good time to start getting greedy and doing a little buying.

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