Head & Shoulders Top in the S&P 500 Til It's Not

March 14, 2016

Mish's Daily

By Mish Schneider

Livin’ in a Trader’s Paradox

What active investor hasn’t done this before? Take a stance on where you think the market is heading, pile up evidence both fundamentally and technically to support that stance, begin to see evidence that casts doubt over that stance, start to think you’re wrong, acquiesce and do the opposite and then…boom-your original conviction turns out correct.

While that boat sails, you are left ashore.

As a trader, that does not mean I do not have positions spread out over several asset classes that are both long and short. In fact, because of my belief in commodities that never wavered this year, I’m doing good. Yet, I always want to do better.

It’s one thing to write spot on analysis. It’s another thing to trade where your fingers are (mouth is). Then, it’s yet another thing to position size correctly. And the last crucial thing is to manage the position well or at least according to the original plan.

It’s sort of the ultimate trader’s paradox: Cannot be afraid to be wrong; cannot be afraid to be right.

What stance am I talking about now?

Last week I did a piece on the potential Head and Shoulders Top in the S&P 500. I featured a chart with 3 ellipses illustrating a left and a right shoulder, plus a head.

I wrote, “If the price in the SPY rises above the head or around 202-204 level, perhaps the monstrous correction that was publicized as the “end of the world as we know it”, was simply just a plain vanilla correction.”

Since those words, I have watched the SPY go up and up. I’ve seen the average daily volume diminish. I’ve witnessed Draghi’s “boldness.” I’ve felt my conviction waver. I have not added any longs. I’ve added one small position in volatility.

All day Monday, I waited for the right shoulder to round the corner slipping away from the head moving closer to the elbow. I waited in vain.

However, with the high of the day in SPY as 203.04, according to my analysis, the Head and Shoulders remains a possibility until SPY clears 204.

And here’s why I write this today

I took a stance that the head and shoulders will play out and the market will decline. I have both fundamental and technical evidence to support my stance. Doubt has clearly been cast over my stance since I wrote that piece. Nevertheless, although I am already thinking that perhaps I was wrong, I have not acquiesced and done the opposite (gone long).

Naturally, I do not know whether or not my conviction will turn out to be correct. But I do know two things for sure-

I’d rather stay sidelined (except for my existing positions) while the market goes up, sit this rally out and not buy it now.
When and if the saleboat (not sailboat)’s Captain shouts, “All aboard (short) that’s going aboard (short),” I will jump on ship.

Here is a case where I am not really afraid of being wrong. Admittedly though, I am more afraid of being right.

S&P 500 (SPY) Tomorrow starts the FED meeting. Meanwhile, confirmed the accumulation day with super low volume. 202 key support to hold

Russell 2000 (IWM) Still far from the 100 DMA let alone the 200 DMA. That means if can clear 109.50 good start. If breaks under 107 though, suspect. Under 106, not good

Dow (DIA) Confirmed the accumulation day with super low volume. 171.40 key support to hold

Nasdaq (QQQ) Must hold 106 and clear 108.

Volatility Index (VIX) If this doesn’t get down to 2015 and turns up pay attention

XLF (Financials) Got right up to the 22.49 resistance again with an inside day.

KRE (Regional Banks) Has to clear 38.50 now after an inside day.

SMH (Semiconductors) 52.95 key support on a closing basis and then 52.35

IYT (Transportation) 136 now support. 138.87 the 3/07 high to contend with

IBB (Biotechnology) Tried to clear Friday’s high 262.16 but then closed beneath it. Still weak

XRT (Retail) 45.50 pivotal

IYR (Real Estate) Inside day. Must hold 74 area

GLD (Gold Trust) Every time this has a decent correction I think its time to buy more. 115 a good risk point

SLV (Silver) Will look better if closes over 15