Given that exactly one week ago on October 5th the S&P 500 failed to pierce through its September highs and has since retraced about, 2.50% some have asked themselves whether the charts are flashing a classic ‘double-top’ sell signal. In short, at first glance a double top is plausible, yet if one digs a little deeper and additionally considers the current structural backdrop of the market the double top argument dramatically loses in merit.
First, lets look at the charts;
The double top formation on the S&P 500 looks very real, in fact the second try at the September highs even came short by a few points, something that is classic double top stuff. However, the sharp rise in equity prices off the June lows has occurred in an orderly and visually very obvious up-trending channel. After the recent correction we are now testing the lower end of this channel (around 1430), which may act as first support. Next support is 1420, which acted as resistance all year until the orchestrated early-September central bank announcements. Those are two important support levels worth watching. The third support level comes in at 1395, which acted as support during the month of August and as a spring board to the September highs. Despite the fact that the double top looks very real, these three important support levels keep a real victory of the double top formation at bay until all of them are broken. Additionally, from an even more near-term perspective but noteworthy none-the-less, many of the momentum oscillators are quickly heading into oversold territory, indicating the downward acceleration may at least be slowing.
On the other hand giving the S&P 500 double top more credibility is the S&P 400 mid-cap stock index (MID) head and shoulders pattern, which if triggered would have an ultimate price target of another 5% lower from here. Granted it would still take a good chiropractor to get that head and shoulders formation to look right (it’s not a perfect setup).
If we now consider the structural backdrop of the current market, where major central banks around the globe are pulling on the same asset-inflating string it is somewhat difficult to see equity prices not rising into year-end and surpassing the September highs. Furthermore a large part of fund managers are still under-performing the S&P 500 benchmark year to date and with many books closing their year at the end of October, a performance chasing rally into month-end is not unthinkable.