Interesting times in the US and global markets, no one seems to be sure where the markets are heading.  News is mixed, and people are wary.  So lets take a detailed look at the technical picture.

Here we use the Sp-500 as a base-line,  however, the chart for the Dow Jones Industrials is very similar.

Chart Courtesy of Worden Brother Inc.

Chart Notes.

• This is a Weekly Chart 1 week = 1 bar
• Stretching from the end of 2008 we can see the March 2009 Bottom
• This scale enables us to view the Head & Shoulders Top that is currently forming
• H marks the Head.
• S marks the shoulders
• The Neck line is a clearly marked white line
• We see negative divergences in RSI & Time Segmented Volume

Technical analysts and professional traders use a specific way of measuring technical zones to which price may move, known as price targets.

With a head and shoulders top (or bottom) the distance between the neck line and the peak of the head (marked A) can be also used to attempt to measure where the downside target may be (also marked A)  if the head and shoulders pattern completes.

How will we know if the head and shoulders pattern completes?

• Price will continue down and break through the neck line
• Volume will increase as price moves through the neck line

How will we know if this  head and shoulders pattern is a fake?

• The price will not break down through the neck line and will proceed in a sideways consolidation
• The price may begin to move upwards towards the 200 week moving average (white dotted line)

Conclusion.

Today is looks like the Head and Shoulders formation will continue and complete, therefore leading to a significant downside to circa 880 – 900.  However with the Federal Reserve making announcements today and the prospect of European Sovereign Debt defaults fading away, we may see a sideways consolidation, and observe confidence creeping back into the market.

Listen to what the market tells you through the technical and you will not go wrong.