SPX Technical Analysis

Head-and-Shoulders Bottom (HSB) Trying to Form in SPX Daily Chart.

The SPX closed on R2 which is the Neckline of a potential HSB. If the SPX could rally today clearly breaking R2, the pattern would be confirmed implying a move to above 1100. The SPX did break out above R1 recently which is good but in the shorter term there are good reasons to expect a few down days (see below).

Unfortunately, it appears this morning it's more likely that R2 will turn the SPX back downward.

• At 45 minutes before the open, the SPX futures are off about 8 points.
• Yesterday, the SPX opened with a gap up. Gaps usually fill so that fact alone implies the SPX should be back at the 870 level sooner rather than later.
• Yesterday's move occurred accompanied by good news with the larger than expected interest rate cut. Big moves on good news are less impressive.
• Historically since 1988, when the SPX gapped up and then closed very strong , the next few days generally recorded losses.

If at the close on a day where the SPX gaps up and closes with an NYSE tick > 1000, you were to short the SPX, on average:

• The next day, the short position would appreciate at a 102% annual rate with 54% winners.
• After two days, the short position would have appreciated at a 120% annual rate with 60% winners.
• After six days, the short position would have appreciated at a 46% annual rate with 64% winners.
• After 15 days, the short position would have appreciated at a 25% annual rate with 59% winners..

This phenomenon occurs about twice a year historically. It also applies to closing ticks as low as 600 with less impressive results the lower the tick. There are no cases before 1988 which is probably due to the lack or real opening data for the SPX in our series which we'll investigate.

Nothing is guaranteed but because of yesterday's action we feel that the SPX will have trouble breaking R2 for the next few days. I hope we're wrong. Honestly had we known this yesterday we probably would have taken profits at the close. But as of this morning, we still plan to stick with our longs in our accounts not managed by mechanical methods into early 2009.

Sincerely,
Steve Hunter, ULTRA Financial Systems LLC