Friday, November 07, 2008

First bottom test: S&P 900 key

The reversal head-and-shoulder pattern will face its first big test Friday. The S&P is the index to watch as 900 needs to hold on a closing basis for the pattern to remain valid. The Nasdaq has a little more room because the nature of the neckline is angled and therefore the right-hand-shoulder will have a lower low than the left.

For the Nasdaq the right-hand-shoulder may be viewed as a traditional double bottom reaction low (with a neckline around 1,675). The early October double bottom was violated by the break to new lows in late October.

Should the S&P violate 900 as support by the close of business then the next target is the October reaction low of 850. Irrespective of 900/850 support the neckline at 1,000 would remain the confirmation level to a bottom. Technicals are mixed with a bullish 'buy' in Money Flow but a bearish 'sell' for stochastics.

A closing break of 850 means the downtrend resumes and the bottoming process is reset to zero.

Dr. Declan Fallon, Senior Market Technician, the free stock alerts, market alerts and stock charts website