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Head and Shoulders Top or Bottom?

Stocks finished the day decisively to the upside as traders cheered the slower-than-expected inflation reading (PPI) and rising jobless claims. The economic data hints of inflation pressure easing in March, and many expect the Fed to slow its tightening cycle in the next couple of months. The minutes from the Fed’s March 21-22nd policy meeting suggest Fed officials see a mild recession later in the year. The bad news is again good news for stocks.


The S&P 500 Index (SPX – 4,146.22) and Dow Jones Average (INDU – 34,029.69) test their February 2023 highs at 4,195.44 and 34,334.70, respectively. The technology-heavy Nasdaq Composite Index (COMPQ – 12,166.27) surged 1.99% and is close to its February and April 2023 highs (12,269.70/12,227.90).


The earnings season is upon us, and investors will focus on first-quarter corporate earnings. The earning releases of banks will provide a guide to the health of the banking system.


Mega caps continue to lead the market, as evidenced by Nasdaq 100 Index (NDX – 13,109.39) surging 2.03%. The market action today is positive. However, the stock market remains in a sideways trading range and can swing sharply in either direction.


A large head and shoulders bottom since May 2022 hints at a market bottom. On the other hand, the Nov 2022 head and shoulders top warns of a market top.


Which of the two patterns will prevail?


The Jan-Oct 2022 bear decline (-27.54%) has transitioned toward a technical base via the May 2022 head and shoulders bottom, with 3,491.58 (10/13/22) as a market low (head). The left and right shoulders are 3,637-3,721.5/3,810 (Mau/Jun/Jul 2022 lows) and 3,764.5-3,809 (Dec 2022 and Mar 2023 lows).


Formidable initial resistance is 4,155-4,279 (Jun 2022/Feb 2023 highs, Oct 2021/Jan 2022 lows, 8/22/22 gap-down, and the 50% retracement from Jan-Oct 2022 decline). Above this suggests a retest of neckline resistance at 4,308-4,325 (61.8% retracement and the May/Aug 2022 reaction highs).


A breakout confirms the May 2022 h/s bottom and suggests a rally toward 4,521-4,697 (78.6% retracement, top of Oct 2022 uptrend channel, and Sept 2021 and Feb/Mar 2022 highs), 4,744-4,818.62 (Nov 2021/Jan 2022 all-time highs), and 5,159 (h/s bottom target).


Initial support rises to 3,948.5-4,033 (50-day and 200-day ma). Violation sends SPX to 3,833-3,909 (extension of the Jan 2022 downtrend and Nov 2022 uptrend) and 3,764.5-3,809 (Dec 2022 and Mar 2023 lows, and the neckline support to the Nov 2022 h/s top and right shoulders to May 2022 h/s bottom).


A breakdown confirms the Nov 2022 head/shoulders top and triggers a decline to 3,584-3,637 (Jun/Sept 2022 lows) and 3,491.58 (10/13/22 reaction low). Longer-term support remains at 3,281-3,393.5 (Aug 2020 V-pattern breakout, Nov 2022 h/s top target, bottom of Jun/Oct 2022 downtrend channel) and 3,083-3,234 (61.8% retracement from 2020-2022, bottom of the 2021/2022 downtrend channel, and the Sept/Oct 2020 lows).


Source: Chart courtesy of StockCharts.com


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