S&P's Double Top Spells Trouble

If it were any other index, I'd be less concerned about the near term, but Wednesday's neat double-top patterns in the S&P cash and futures give me additional reasons to be on the alert for a near-term top.

S&P Cash Again turned back at its Nov. 11 gap Lind-Waldock

Recall that the S&P cash topped out Dec. 8 at the 918 level, not far from its Nov. 11 gap at 919.21. From there, the S&P would sell off again, reinforcing this level as near-term resistance. Then, after the 7% drop into last Friday's lows, it was back up again -- back up to the same level.

Yesterday, after the gap-down open, the SPX popped up to fill the opening gap, continuing higher till it made it back up to a slightly higher high for the move -- taking out that Dec. 8 high by just 0.28 points -- and turning back down from there. Yesterday's slightly higher high at 918.85 now creates the look of a short-term double top. Adding to the significance of this level as near-term resistance is that this latest high was only 0.36 points shy of the still-unfilled gap from Nov. 11 at 919.21.

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The double-top pattern in the S&P was not only evident in the cash, but also in the futures -- in the now-expiring December contract shown below as well as in the March S&P, the new front-month contract.

December S&P Futures Double top at the 919 level Lind-Waldock

In the futures, the return to the area of the Nov. 11 gap at 921.50 wasn't as much of a bull's-eye as it was in the cash, but you get the idea -- the Dec. 8 high of 919.00 was 2.5 points shy of that gap. Then yesterday's higher high of 919.50 -- again creating the look of a short-term double top -- was just 2 points shy. So the gap is obviously a factor, though it's not quite as picture-perfect as it appears in the cash (shown above).

Here as well, the resistance in the 919 area of the December contract (the equivalent high in the March contract is now 918.00) is pretty clear. Above that, the still-unfilled gap at 921.50 should provide additional resistance in the futures. On the other (more bullish) hand, a pop above this level will lead higher -- and there are reasons to expect that move higher in the weeks, if not days, ahead. More on that in a moment.

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Nasdaq 100 (NDX) No higher highs here Lind-Waldock

Another bearish pattern -- though not qualifying as a double top -- has been produced in the Nasdaq 100. Here, in the chart at right, you will note that after making a new multiweek high last week (Dec. 9) around 1252 (not coincidentally just a fraction of a point above the now-filled Nov. 11 gap at 1251), the NDX has been unable to return to that level. In fact, adding to the bearish look of the pattern, the NDX -- and only the NDX -- has left a small gap unfilled from Tuesday's close at 1243.49.

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Russell 2000 'January Effect' in effect OptionsXpress

That's the bearish news. But on the bright side, we are seeing some good relative strength in the broader market, as seen in yesterday's pop in the Russell 2000 despite lower closes in the SPX and Dow. Today, the Russell 2000 has made a higher high for the move while the major averages have so far been unable to get back to yesterday's highs.

Also noteworthy was that breadth was positive yesterday on the NYSE despite the negative close in the major averages. Another bullish indication.

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Last week I noted that it was too early for Santa, referring to the "Santa Claus Rally," which is scheduled to begin next week -- on Wednesday, to be exact. That should lead to some bullish action before year-end; at least it usually does.

Volatility Index (VIX) Not as bullish as some suggest OptionsXpress

But then, for the very short term, the market is again quite overbought -- the McClellan Oscillator closed yesterday at a bloated +202.7. And once again, the ultimate contrary indicators are calling for higher prices, as VIX "experts" come out of the woodwork to tell us -- as they always do at market tops -- that the collapse in the VIX is bullish. They have never been correct on a short-term basis, and I suspect they will get this one wrong as well.

We will get a year-end rally, but I sold into Tuesday's rally, both before and after the Fed announcement, so I am not quite ready to get all giddy about the market right here and now.

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Know what you own: Schiller mentions the indices. ETFs that track major indices include ProShares Ultra Dow 30 (DDM - commentary - Cramer's Take), ProShares Ultra S&P500 (SSO - commentary - Cramer's Take), ProShares Ultra QQQ (QLD - commentary - Cramer's Take), Diamonds Trust (DIA - commentary - Cramer's Take), ProShares QQQ Trust (QQQQ - commentary - Cramer's Take), SPDR Trust (SPY - commentary - Cramer's Take) and iShares Russell 2000 (IWM - commentary - Cramer's Take).

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At the time of publication, Schiller was long mutual funds, generally 25% to 40% invested levels; short bond funds 10% to 20%, although holdings can change at any time.

Dr. Harry Schiller is a Registered Investment Advisor with the California Dept. of Corporations. He holds a Series 7 General Securities license as well as a Series 4 Options Principal license. He has been owner and editor of the Short Term Consensus Hotline since 1988. For more information, see www.harryschiller.com. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.