Saturday, 5 September 2009

The S&P 500 could be headed to 700

Back in early July there were several commentators pointing to a chart formation which is known by technical anoraks as a Head and Shoulders pattern. There was a rather persuasive argument that if the 870 level had broken down the market could have given back most of the gains from the March low. On July 8th the actual intraday low on the S&P 500 cash index was 869.32 but in subsequent sessions the neckline held and we have since then moved on up almost to the 1040 level.

The chart above shows the projection of the neckline - still at 870 - but with a another possibly larger head and shoulders pattern developing. The right shoulder could initially be seen just as a mini version of a more localized version of the pattern with a neckline of the August lows of 980. If that was to develop then there would be a rather intriguing fractal pattern with a series of nested head and shoulders patterns and the possibility of a right shoulder developing as drawn in on the chart.

The suspicion is that if this price development was to take place - and it is just an hypothesis for consideration - the more aggressive technical traders would call the bluff on the shoulder padding and be targeting the projected 700 level sooner rather than later.

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