US 500 Index: Potential Head and Shoulders Top?The US 500 Index has been under pressure at the start of 2025 after a series of strong US economic data readings see traders and investors dismiss any hopes of a Federal Reserve (Fed) rate cut in the first half of the year from their minds.
Not only that, uncertainty around Donald Trump’s actual plans for US tariffs on key trading partners has weighed on sentiment, given that we are less than a week away from him officially starting his second term as US President.
Before then tomorrow’s US CPI release at 1330 GMT needs to be negotiated. The path of US inflation is at the top of the Fed’s list of points to focus on and this means traders will be ultra-sensitive to any print that deviates from expectations.
Where Does the US 500 Index Stand Technically?
A positive trend within the US 500 index has dominated price activity for many months, where any weakness has been limited by buyers at higher levels each time.
This buying support has proved strong enough to hold declines, turn the index higher and breach the previous failure high, extending the positive uptrend pattern, ensuring a pattern of higher price highs and higher price lows.
Of course, these bullish patterns don’t remain in force for ever, and the natural ebb and flow of buyers against sellers shifts from one being dominant over the other, creating price strength or weakness.
However, since the 6101 December 6th all-time high, price sellers may be the ones that are gaining the upper hand, as a more extended phase of price weakness has been seen.
In the process, possible signals have emerged that may show reason to question the sustainability of further price strength.
A first possible sign of a trend change came on December 18th (the reaction to that days FOMC meeting) that saw closing breaks below support offered by the rising Daily Bollinger mid-average.
While this alone isn’t an outright negative signal, it is interesting that on both December 26th and January 6th, attempts at price strength were held and reversed by the then declining daily mid-average.
Has Activity Formed a Potential Bearish Head and Shoulders Pattern?
The close below the mid-average followed by the average turning down can be a sign of a downtrend in price, especially as it capped further attempts to move back to higher levels. However, this isn’t a guarantee of future price weakness and much still depends on future price trends.
That said, there is also possible further evidence of a sentiment shift in the shape of a technical pattern called the Head and Shoulders top. If this is the case, risks may turn towards a more extended retracement of latest strength.
What is a Head and Shoulders Top?
A Head and Shoulders pattern is a possible indication of directional change in price. It is formed by 3 peaks in price activity.
Left Shoulder:
This forms when price strength reaches a peak, where sellers are found to turn price lower.
If this is the type of pattern currently forming within the US 500 index, the Left Shoulder could be marked by the 6030 November 11th high.
Head:
After declining following the Left Shoulder, price then rallies to break above the previous peak, and post a new higher high, only to fail and see a setback towards the previous low.
Within the US 500 index chart above, this may be marked by 6101, the December 6th all-time high.
Right Hand Shoulder:
This is where price rises again, as buyers still view weakness as an opportunity to go long, as has proved correct on previous occasions. But this time, sellers develop at a lower level than the ‘head’ and subsequent price weakness sees a more extended phase of weakness.
On the chart above, the Right Shoulder could prove to be the 6040 December 26th high.
Neckline:
This is the support line drawn by connecting the lowest closing points of the 2 troughs between the Left Shoulder and the Head, and the Head and the Right Shoulder. This can be horizontal, or as is possibly the case within the US 500 index, slightly sloping.
It’s closing breaks of the Neckline that could suggest completion of the pattern, which may have developed at last Friday’s US 500 index close.
Because formation and confirmation of a Head and Shoulders Top in the past has seen price weakness doesn’t mean it will do so again. However, Friday’s close below Neckline line support may suggest a sentiment shift and lead to further price weakness and deeper retracement of the April 2024 to December 2024 strength.
That said, fresh price strength isn’t ruled out by the formation of this possible reversal. Although, it would seem as if breaks and closes back above the 5921 declining Bollinger mid-average are now required to ease the threat of a deeper price decline and prompt potential to resume the recent uptrend pattern.
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