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Sentiment, Chart Signal Suggest a Stalling S&P 500

The biggest risks to this year's gains in SPY would be seen if the Fed does make the choice to start making reductions in its monthly bond purchases (currently seen at $85 billion). Early estimates suggest that these monthly purchases will be lowered by $10 billion, so anything beyond this would suggest a deeper downside correction in the S&P.

On its face, this is not something that should concern the traditional "buy and hold investor." But it should also be clear the market environment we have seen in the last five years is an entirely different animal. For those of us looking to buy dips, it makes sense to wait for these downside corrections before establishing new bullish positions.

The S&P 500 has rallied more than 150% from its 2009 lows. This year alone we have seen gains of more than 20% and new all-time highs have been established in the process. Nearly 450 companies have seen bull moves in 2013, and trends like this have not been seen in more than 20 years.

This is a lot of optimism. While P/E valuations remain supportive, moves of this size warrant some level of caution. Buy dips, rather than upside breakouts.

S&P 500 Chart Perspective

Late-week declines in the S&P 500 end a month-long trading range and mark the completion of a head-and-shoulders chart pattern. This pattern is my personal favorite reversal indicator because it suggests prices have made a clear attempt at a new high, only to reach an exhaustion point and fail drastically in the end.

A clear break of the pattern's neckline occurred at 1675, and the expected follow through has resulted in lows of 1654 thus far. Expect any short-term rallies into 1670 to meet additional selling pressure.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Cox is based in China, and has lectured at several universities there on international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of Web sites, including MarketBulls.net, Seeking Alpha, FX Street and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.
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