Sam Collins

More Downside Likely Ahead for the S&P 500

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S&P 500 (SPX) -- Even though the S&P 500 picked up almost 6 points to close above 900 (smack on the 50-day moving average), the near-term trend remains down. And the trading zone is still at 880 to 930.

But, if I back off and take an overview of the chart since the beginning of the year, it has the appearance of a possible reversed head-and-shoulders with the neckline at 956. An upside breakout from that pattern would yield a target of around 1,300.

But hold on there; it isn't that simple. Since April, the 880 to 956 range-bound trading zone (grey oval) looks like a head-and-shoulders developing with the left shoulder at 930, the head at 956, and the right shoulder still to form.

If, indeed, the market is forming a small head-and-shoulders, then a breakdown of the neckline at 880 yields a target of 804.

The near-term downtrend is intact, but a move to the top of the trading zone at 930 may be about to occur, giving sellers another opportunity to lighten up or take on new short positions.

So, until this pattern is resolved, the strategy is to sell at S&P 920 to 930, or sell on a breakdown close under S&P 880.

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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks.