Home > Head and Shoulders Pattern Signals S&P 500 Reversal

Head and Shoulders Pattern Signals S&P 500 Reversal

It’s time for technical traders to take note of the chart pattern that possibly signaled the start of the bear market at the end of September 2021.

There are two schools of investing thought: fundamental analysis (or “assessing a company’s true value”) and technical analysis (or “predicting price changes from patterns on charts”). Today, I’m going to talk about technical analysis, because I think we just saw the S&P 500 index sketch out a head and shoulders formation pattern that could signal the markets going south now that we’re out of September.

What Is a Head and Shoulders Pattern?

To answer this question, let’s look at the S&P 500 price chart for the past couple of months. Can you see how the shape resembles a head (2) between two hunched shoulders (1 and 3), with a neckline indicated by the blue line? I could even make a case for a smaller head and shoulders above this one, on a shorter timescale, and you should be able to see it.

S&P 500 Index Chart (source: Yahoo! Finance)

The key takeaway for a head and shoulders formation is that it predicts a bullish-to-bearish trend reversal.

Should You Sell the S&P 500 On This Bearish Signal?

I’d already shorted the S&P 500 index, so I don’t need to sell now, but I’ll be holding onto my short position to see how far into profit it can go as the market goes down. For me, the October Effect could make this month one of the best times to invest, albeit on the “short” side.

What you do is of course up to you, but this definitely does look to me like a head and shoulders pattern, and the neckline is distinctly sloping downwards.

Where Can Sell the S&P 500 Index Short?

If you want to short US stocks because you’re now a market bear, you’ll need a broker that lets you trade CFDs, spread bets, or similar financial instruments underpinned by indexes such as the S&P 500. Here are two top brokers to choose from:

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