If the past couple of days seem somewhat familiar, it’s because we saw a similar pattern in March. After backtesting the 2.24 Fib extension (2728.79) on March 8, ES rebounded sharply — closing barely in the red for the day and roaring 50 points higher the following day. It didn’t stop until it had piled on 233 points — about 8.5%.
Repeated bounces off a horizontal line of support can be great for stocks – indicating that it’s safe to buy. The only hitch is if the third bounce only extends as far as the initial one. In such a case, we have the potential for a Head & Shoulders Pattern — which is quite bearish.
We’ve seen it happen twice already: the neckline between Apr 3 and May 8 which targeted 2806 (ES reached 2799) and on a larger scale between Mar 12 and May 28 which targets 2638 (a 10.9% from the April highs.)
This one is a little suspect, however, as ES bounced back above the neckline (for now) at 2806. In so doing, it also broke out of the falling purple channel,
The bulls have the reins as long as they can keep ES above 2806 — broken above the neckline and broken out of the falling purple channel. But, if it should fall back below 2806, then the H&S targeting 2638 will be back in business and we’ll set up a much bigger H&S (with the 2.24 Fib as the neckline) targeting 2495. This would be a 15.7% drop from the all-time highs.
Bottom line — if this break out turns out to be a head fake, watch out below.
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