One nice thing about patterns is that they give you something to hang your hat on. When we drew the Inverted Head & Shoulders Pattern on Jul 3 [see: Holiday Headfake] there was nothing in the news to suggest a 100-pt rally in the ensuing week.
Yet, SPX and ES landed within a point or two or their IH&S targets yesterday all the same. Likewise, all the news was rosy yesterday — incessant talk of renewed buyout fever and imminent, glowing earnings reports.Yet, completion of the pattern, combined with a channel midline, put a pause on the rally right where expected. With its SMA200 now a mere 30 points below its 2.24 extension, SPX can backtest any time it likes with plenty of support around 2700.
In fact, if ES is able to hold the (formerly broken) channel into which it reinserted itself, the damage would be limited to 20-30 points.
One key: VIX. So far, it has put the brakes on at a backtest of the recently broken straw-man trend line. If it can remain below the red TL and the SMA200, and USDJPY keeps ramping, stocks will suffer a mild pullback. If the coming drops in oil and gas get going, then SPX will do well to hold 2750 and, depending on the PPI/CPI numbers due out today and tomorrow, could test 2700 again.
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