S&P 500 Faces a Bearish Head-and-Shoulders Pattern as Key Support Breaks

Pattern that appears to be forming is a “Head and Shoulders Top” (noted on chart above). Last Friday SPY showed a “Sign of weakness” through the support level which was the previous lows near 755 with a “Sign of Weakness” (SOW); now the 755 range should now be resistance. Head and Shoulders patterns have symmetry both in price and time. If the Left Shoulder took 2 months to compete than Right Shoulder should also; two months from now would takes up into early January.

Therefore, a possible trading range may develop between 755 to 725 SPY range (forming the Right Shoulder) into early January. The bottom two windows are the 5 and 10 day TRIN; both are not showing panic and panic only forms near lows; so there is no panic here suggesting no worthwhile low is forming here.

Momentum rules all indicators. Above is the weekly SPX with its Bollinger band in top window and bottom window is the weekly SPY/VIX ratio with its Bollinger band. This is on a weekly time frame therefore the signals come on Friday’s close and on Friday’s close both indexes closed below their mid Bollinger bands creating a sell signal. We shaded in pink the past signal when both closed below their mid Bollinger bands. The weekly SPX fell below the support level near 7600 with a “Sign of weakness” and now the 7600 area should become resistance.

On Friday’s report we noted that we would cover the technical’s that the gold stocks (GDX, XAU) would outperform the equity markets (SPX, NDX) in the coming years. The bottom window is the monthly NDX next higher window is the monthly XAU/NDX; next higher is the RSI for the monthly XAU/NDX and top window is the monthly XAU. This chart goes back to 1982. When the monthly XAU/NDX is rising than XAU is outperforming NDX when declining than NDX is outperforming XAU. We noted in blue when the RSI for the monthly XAU/NDX is above 50 showing that the monthly XAU/NDX ratio is rising and shaded in pink when the RSI stays below 50 (falling XAU/NDX ratio). When an index rallies strongly off a low this condition is referred to as a “Sign of Strength” and suggests an “Initiation of an uptrend”. This condition happens back in 2002 on the XAU/NDX ratio (rally lasted another 10 years) and again in 2024 suggesting a large rally is beginning in the XAU/NDX ratio. We noted a 12 year cycle with a blue semi circle that has worked well. If the 12-year cycle hold true, this time around than the XAU/NDX ratio may rally another 10 years. As long as the monthly RSI holds above 50 than the XAU/NDX ratio is considered in an uptrend and this condition suggests gold stocks (XAU) will outperform the equity market (NDX).