SPX Technical Analysis

Head-and-Shoulders Bottom (HSB) Confirmed.

On Friday, the SPX closed above the neckline (NL) of an HSB. The good news is that this pattern implies a move to SPX 1140, which is the distance from the NL to the Head projected upward at the breakout point. The bad news is that this pattern is not very well formed as the left and right shoulders aren't remotely similar.

However, I still believe that this break is important and therefore it's likely that the SPX will run up to R1 at 1000 at which point I expect a correction possibly back down to NL. I believe that R1 is likely to turn the SPX back down because:

• The 1000 level (R1) is a round number, which will represent a good profit objective for those of us sitting on profits
• The 11/4/08 high, which R1 is drawn from was an important failure for the market preceding the huge drop to 740.
• The market often moves symmetrically. A move up to R1 and then a correction would replicate the action on both sides of the 11/4/08 high.

Assuming this scenario unfolds, R1 would become the neckline of a larger HSB. If R1 were to be overcome it becomes likely that 2009 becomes a big bull market year for the stock market.

A HSB pattern failure is also a possibility, especially if this is just a bear market rally. If this rally falters and S1 is taken out to the downside, I'll expect a retest of the 740 low. If this low is taken out the market will go substantially lower.

Therefore, with my capital not controlled by mechanical methods, I will sell to 100% cash on the next close above 990 hoping for R1 to turn the market lower so that I can buy back in upon a retest of NL at 920.

Sincerely,
Steve Hunter, ULTRA Financial Systems LLC