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Weekend Stock Market Analysis

(11/17/12)

Overall we could be in the middle stages of a developing Head and Shoulders Top pattern which will take a few more months to complete.   The Neckline support area (green line) would coincide with the longer term upward trend line (black line) and June low so look for a possible retest of the mid to upper 1260's at some point.  However since we are entering a favorable seasonal period for the market (Thanksgiving through Christmas) it's possible the retest will not occur until sometime in early 2013.   Once the Neckline support area is tested then a decent oversold bounce would follow as the 2nd Shoulder develops to complete the pattern in the lower 1400's.   Keep in mind we saw a smaller Head and Shoulders Top pattern back in 2011 prior to a 20% drop in the S&P 500.    

Meanwhile there has been no panic among investors as neither the Volatility Index or the 5 Day Average of the Put to Call Ratio has risen to levels that have signaled nearing bottoms.  So far the 5 Day Average of the VIX hasn't even risen back to the 20 level.  Back when the S&P 500 bottomed in June it reached at least the 25 level (point A).

Meanwhile the 5 Day Average of the Put to Call Ratio has risen above the 1.25 level (points B) before bottoms occurred the last three times.  Currently the 5 Day Average of the Put to Call Ratio is just above the 1.0 level (point C).  Thus there is still quite a bit of complacency among investors as we near the end of the year. 

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