The S&P 500 bounced off its 200 Day Moving Average this week (green line) which was at the 1258 level. Meanwhile the longer term upward trend line (blue line) from the March 2009 low is rapidly approaching the 1258 level as well.
At this point there are two possible scenario's to watch for. The first scenario is that the the S&P 500 peaked at the 1371 level and we are now seeing a larger Head and Shoulders Top pattern developing. The first Shoulder was the high made in February at 1344 while the Head was the high at 1371. Meanwhile if the S&P 500 does hold support at its 200 Day Moving Average and undergoes a multi week rally the 2nd Shoulder could rise back to around the 1344 level. Once the 2nd Shoulder completes later this Summer then we would see a test of the Neckline (black line) in the Fall.
Meanwhile the second scenario is that we are seeing a complex Broadening Top (Megaphone) pattern developing which means one more higher high is coming. An example of a large Broadening Top pattern occurred from the late 1960's through the early 1970's in the S&P 500. Notice in this pattern Wave 4 is lower than Wave 2 and once the final 5th Wave completes to the upside a large correction follows.
If we are seeing this pattern develop then the S&P 500 may briefly drop below its 200 Day Moving Average and test the 1233 area which is the 38.2% Retrace from 1011 to 1371. Once the 4th Wave completes then a sharp 5th Wave rally would occur to complete the pattern by the end of Summer. The target for the 5th Wave would be in the 1382 to 1400 range.
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