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Short S&P When 1,030 Support Is Breached: Charts

There are some significant differences, but also similarities, in the behavior of the blue chip Dow Jones Industrials and the broader S&P 500 indices. Historically the most significant difference is in the way the 2009 recovery trend was defined.

The Dow's breakout in 2009 developed from an inverted head-and-shoulder pattern. The S&P's breakout, on the other hand, was a more classic one, breaking off above the downtrend line. this is important because it shows a divergence in behavior between the two indices - something we need to take into consideration when interpreting their current patterns.

The S&P's current uptrend top-out pattern is similar to the Dow. It shows a head-and-shoulder pattern, and also repeats the double-right shoulder development seen in the DOW. However this pattern is not as dramatic or as well-developed as the Dow pattern.

The S&P has strong support near 1,030 and is this the first key analysis feature. A close below this level confirms the development of the downtrend. Unlike the Dow, there is no midpoint consolidation area within the head -and-shoulder pattern. This strengthens the importance of a weekly move below 1030.

The S&P is better analyzed using support and resistance features. A fall below 1,030 has an initial downside target near 940. This is the upper edge of a trading consolidation band. A move below this level uses the lower level of the trading band at 880 as support.

Traders must be careful not to confuse co-incidence with correlation. However the 880 target is also the target set using the weak head and shoulder reversal pattern. This is used as a guide to potential development rather than a firm target that we use with DOW analysis.

The S&P remains within a narrow trading band between 1030 and 1150. There is developing downside pressure so traders will treat this as a non-trending market and trade the short term rally and retreat behavior. A fall below 1030 is a signal to open short positions.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

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