Technical Overview: Head & Shoulder Pattern Completed

Last week I commented on the technical condition of the equity markets by pointing out that a continuation head and shoulder pattern was developing right at the support of the uptrend (see: Head and Shoulder Continuation Pattern).

That pattern has now completed and can be seen in all the major equity indexes (Dow Jones, Nasdaq, etc.). The measured move would imply a symmetrical move to the upside relative to the move from the neckline down. Depending on where you draw the line and whether you calculate from the lowest intraday price level or the close of the day you will get an upside target somewhere between 1400-1425.

As I wrote previously, “I’m expecting the head and shoulder continuation pattern to complete but I’ll be watching the final push up to provide important information in terms of the breadth that underlies that rally.” Looking at the cumulative advance decline line of the S&P 500 index we see that for the first time in a long time, it is starting to lag the underlying equity index:

Source: Bloomberg

The S&P 500 index has now broken above its previous tops in mid-February and early April. But the cumulative AD line is still below its April highs (although it is above its February highs). This is a definite shift in the tone of the market as almost all throughout the bull market, we’ve observed the breadth measure lead the index.

The ratio of 52-week highs and 52-week lows on the Nasdaq is also showing some signs of fatigue. We have yet to see the burst of 52 week highs (relative to lows) the way that we did in previous market rallies:

As well as these technical and breadth measures, I’ll be watching the developing sentiment landscape in the upcoming weekly sentiment overview to try and gauge the probability of a continuing rally into the 1425 target area for the S&P 500 index.

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