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Add S&P to the Negatives

No one's discussing the head-and-shoulders pattern in this index, but it's there and it's ominous.

The first thing that struck me when I posted the statistics on Friday was that December turned out very much like June, with a few variations. In both months we rallied early and spent the remainder giving it back, only to close the month exactly where we started.

You might recall early in the month of December I made the comparison several times that December could be just like June. In June we opened the


for trading at 1191 and closed at 1191. In December we opened at 1249 and closed at 1248. So now I'm sure you're wondering if early January could be a repeat of the fireworks we saw in early July.

First, let me remind you that the first week of July was not great from the start. The S&P started the month at 1191, had a few big down days and a few big up days and one week later when we opened for trading the day of the London bombings, we were still at 1194. We didn't make a low until the bombings.

Now let me take that even one step further: We may have subsequently rallied the S&P until early August, but the majority of stocks making new highs peaked on July 11, exactly three trading days after the London bombings. But honestly, I don't see that as a probability here.

We can however see a very short-term rally as we open the year. But since we are only moderately oversold -- and that is the only indicator I follow that says we can rally -- if we do get a rally, it likely will be short-lived.

All of the indicators I have been writing about for the past few weeks that have rolled over and are pointing downward continue that way.

That means the new highs and new lows are negative.

That means the McClellan Summation Index is negative.

That means the 30-day moving average of the a/d line is negative.

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That means sentiment indicators say there is still way too much bullishness around.

But let's add a chart of the S&P 500 to that list. Two weeks ago, I showed the S&P in a channel and I thought the upside was limited by the channel line, which came in around 1278. Well, we never even got there. We failed a few points lower. But now I see a pattern I missed prior to this: a head-and-shoulders top.

Longtime readers will know that I do not often discuss H&S patterns in the major averages, as they seldom work. My view is that too many see it and therefore prepare for it, so it ultimately does not pan out. The market is rarely that accommodating.

However, I find that this time around I have yet to see anyone make a fuss over this particular pattern in the S&P and therefore, I will give it credence so long as others dismiss it.

The pattern measures to the 1230 area (head=1275; neckline=1250; differential=25; subtract 25 from neckline of 1255 and you get 1230). Now take a look at a longer time-framed chart and you can see that the uptrend line and the broken downtrend line all intersect in that 1225-1230 area. So for now let's say that we can see the S&P heading in that direction in the month of January.

If we should rally in the short term, I can see that the resistance level should be viewed as the underside of the neckline, which is approximately 1260. Therefore any rally to the 1260 area ought to be sold with a target in the 1225-1230 area.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's


Helene Meisler writes a technical analysis column on the U.S. equity markets and updates her charts daily. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At the time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback;

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