Technical Support for the Bulls

Below is a daily chart of the S&P 500 that depicts, what appears to be, a head and shoulders bottom.  Probably the most widely known chart formation out there, the head and shoulders bottom is unique in that a successful completion of such a formation often provides a projection for the subsequent move higher.  In this iteration, the formation would suggest that the S&P 500 could move as high as 1,235 before reversing.  Not exactly the type of indication that a bearish guy like me wants to see, but it's a development worth noting just the same. 

ONE MAJOR CAVEAT:  Head and shoulders formations (both tops and bottoms), more often than not, need confirming volume signals to validate their authenticity.  In the case of a head and shoulders bottom, volume on the right shoulder should be fairly high when compared to the levels seen at the left shoulder and head.  This formation clearly does not meet that criteria.  As such, the formation itself along with the associated projection need to viewed with a fair bit of skepticism.  None the less, the mere appearance of this formation, even if imperfectly developed, could help explain why equities have continued to melt higher in the face of soft economic data both domestically and internationally. 

Fundamentally, I still remain in the bear's camp, especially given the speed of the recent rally, but it's hard to fight a market that simply wants to move in one direction.  Keeping this formation in mind should at least help cap the losses in my short position as a break through 1,175, in my mind, would pretty much confirm the 1,235 target, especially since we are entering a traditionally bullish time of year.

Until Monday.....