In a surprise move, the S&P 500 has confirmed a head and shoulders top pattern, signaling a major turn-around in the stock market. Analysts have long been predicting a pullback in the market, based on the historically high level of investor enthusiasm as well as a weakening of the economy.
This pattern, which typically signals a potential reversal in price sentiment, is created by three consecutive peaks and is widely associated with market tops. This pattern was also observed recently in the Dow Jones Industrial Average (DJIA).
In this case, the S&P 500 has formed a large horizontal line that will act as the neckline and is extended from peak to peak. The trough that will be the “shoulder” will be the second peak and the third peak will form the “head” of the pattern. If the support line is broken, it could lead to significant losses for the index, but also for individual stocks within the index.
The current head and shoulders top pattern in the S&P 500 follows the same pattern seen several weeks ago in the Dow Jones Industrial Average. The primary problem stemming from this pattern is that it indicates that the stock market is potentially overpriced and may be due for a correction. While stock prices may continue to remain higher for the foreseeable future, investors should start to factor in a potential downturn in prices in their long-term investment plans.
That said, not all analysts see this pattern as a death knell for the stock market. Some analysts point out that it could merely signal a consolidation period and potentially a rise in prices if the support line holds. This could be the result of a value mirage where investors are attracted to a stock at too high a price and only realize the value of the stock later when the price corrects.
Regardless of the outlook, the fact remains that the S&P 500 has confirmed a head and shoulders top pattern. Investors should be aware of the potential risks associated with this pattern and take steps to protect their investments if the market eventually falls.
