Head And Shoulders Setup About To Complete On S&P?

The S&P 500 is carving out a picture perfect head and shoulders pattern on the year-to-date chart - but will it complete? We should find out soon enough. The first shoulder was put in on February 18, when the S&P put in a swing high of 1,343. This was followed by a steep sell off in the wake of the Japanese tsunami and subsequent nuclear disaster in that country. The head formed when the S&P hit a multi-year high on April 29 of 1,370. This was of course was followed by the sell-off that led up to the end of QE2. During Wednesday's trading session, we are putting in the second shoulder in the pattern, with the S&P trading up to just under 1,340. If the head and shoulders formation is going to complete, we should see a sell off over the next couple of weeks, potentially down to the neckline which is in the 1,260 range. If these levels were to break, it would be very bearish for the outlook of the stock market going into the fall. Technical patterns such as the bearish head and shoulders that is being painted on the S&P are always speculative in nature. There is a lot of bullish momentum in the market right now, and the S&P could easily smash through resistance in the 1,340 area and continue on to make new highs. This pattern, however, is certainly something to take note of, as it is quite obvious on the charts and will draw the attention of market participants. ACTION ITEMS:

Bullish:
Traders who believe that technical patterns are a bunch of hocus pocus, and are looking to gain long exposure should consider broad based U.S. equity ETFs:

• The SPDR S&P 500 ETF SPY tracks the performance of the S&P 500. The ETFs low expense ratio makes this a perfect vehicle to capture broad moves in the stock market.

• The iShares Russell 2000 Index ETF IWM provides exposure to a basket of small-cap stocks.

• The PowerShares QQQ Trust ETF QQQ gives traders exposure to the performance of the Nasdaq 100 - perfect for those wishing to express a bullish bias.

Bearish:
Traders who believe that the head and shoulders pattern forming on the S&P is worrisome may want to go short the market:

• Consider the ProShares UltraShort S&P 500 ETF SDS. This ETF will be a winner if the market takes a quick dive.

• The ProShares UltraShort Russell 2000 ETF TWM tracks 200% of the inverse of the Russell 2000.

• The ProShares UltraShort QQQ tracks 200% the inverse of the Nasdaq 100. This ETF will do well if market sentiment undergoes a quick reversal in the coming weeks.

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