Double Top or Inverted Head and Shoulders?

Yesterday we saw another 80% decline day as the market violently whipsawed out of the buy signal it gave on Tuesday. Negative breadth on the NY Exchange reached as high as 90%, meaning that 90% of the stocks traded on the NYSE traded in negative territory.

It is unclear what will happen next, but here are a few things to think about.

First, over the past six months, the market has seen ten 80% decline days. Seven out of ten times the market rallied hard the following day.

Second, while we don't know what the market is going to do next, the S&P can offer us a clue today.



As you can see on the chart above, the SPY closed at its right shoulder support on the inverted head and shoulders pattern it has been trading in over the past 6 months.

Keep in mind that the pattern can also be interpreted as a double top.

What happens next will help us determine what to expect next. If the right should support holds and buyers step in here hopes for a 4th quarter rally will be kept alive.

However, if the market follows through and closes lower today, the only reasonable interpretation will be that the market has entered a downtrend.

What to look for next?

• Follow through lower today would be a clear support violation and a signal to exit all long positions.

• A weak bounce today would offer a warning that support is in danger of breaking soon and would be a signal to exit all long positions.

• A strong rally day would signal that all remains healthy and would keep hope for a 4th quarter rally alive.