Update on the major top in U.S. stocks

The right shoulder of a massive head and shoulder top continues to unfold

This post updates my report from July 28.

The 7-month H&S top many U.S. stock market indexes continues to form. On Friday the NYSE Index penetrated the lower boundary of a 6-week symmetrical triangle that could be serving as the right shoulder of this pattern, as shown below.

This completed triangle now sets the stage for an attack on the dominant trendline from the March 2009 low and a test of the neckline of the 7-month top. Both of these chart points are signficant to the intermediate trend in stocks. It is important to remember that a H&S pattern is NOT a H&S pattern until the neckline is violated on a closing price basis by at least a few percentage points of price value. I would say that a close under 7750 is required to confirm the certainty of the top. Until this occurs the stock market remains in an uptrend on a daily and weekly basis.

Also, it is important that a H&S pattern in the stock market complies with a certain volume profile. Specifically, the highest volume should be in the left shoulder or head with reduced volume during the right shoulder. In fact, as a general rule a contraction of volume is NOT a bullish indication.

The weekly chart of $SPX below shows that volume has contracted during the entire advance from the March 2009 lows.

Additionally, the volume during the 7-month H&S top in $SPX has shown the classic volume profile, with the heaviest volume in the left shoulder and the lightest weekly volume during the high week of the right shoulder. That volume picked up last week could be a sign that distribution is complete and supply will begin to overwhelm the market.

The bears appear to have gained control of the U.S. stock market. Indications that my immediate analysis is incorrect would include the following.

  1. The market will consolidate for a few weeks at or above the neckline and 28-month trendline.
  2. An advance from this consolidation will begin.
  3. The early July highs will be penetrated by all the major indexes.

Until the above occurs the odds favor the completion of a major top. The debate over the debt ceiling could result in extreme volatility next week. This volatility could make any breakout tricky to trade.

Markets:  $DJI, $DJIA, $DIA, $SPY, $SP_F, $SPX, $NYA, $RUT, $$

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