The S&P 500, the United States’ longest-running and arguably most reliable market index, appears to have finally confirmed a Head and Shoulders top pattern. This pattern which is often seen during the peak of growth slowing, is characterized by a peak followed by a lower high, and then a third lower peak. This is when the shoulder (or lower peak) forms the Head and Shoulders pattern.
As with any major pattern, investors should be making moves in anticipation of potential changes in the market, as Head and Shoulders patterns are known to precede market downturns. In this particular situation, the S&P 500 had been on a steady upward trend in the first quarter of 2021, however it appears the increase has leveled off, with the Head and Shoulders pattern forming in April.
For those that aren’t familiar with the Head and Shoulders pattern, let’s take a closer look. When it comes to market indexing, such as the S&P 500, the Head and Shoulders pattern usually reflects a period of exhaustion. When prices reach an all-time high (the “head”), they then drop a bit (the “left shoulder”), continue up again (the “right shoulder”), before dropping below the starting point of the “head” again. This is a classic sign of a trend reversal, and can eventually lead to declines.
Despite the Head and Shoulders pattern being visible here, the S&P 500 is still trading close to the highs that it established at the beginning of 2021. That being said, if there is no meaningful action taken to correct the trajectory that the S&P 500 is on, then the Head and Shoulders pattern is likely to extend further.
Investors should also be mindful that when a Head and Shoulders top pattern develops, it is typically preceded by periods of slowing growth. It is likely that the S&P 500 is now in one of those periods as the rate of growth has decreased from its previously “irrational” levels earlier this year.
Given the current market dynamics, investors should certainly be taking proactive steps to protect their investments and to be aware of the possibility of a downturn. Furthermore, it is also important to remember that it is not always certain that the Head and Shoulders pattern will be a sign of an impending downturn. This is especially true when the market conditions are constantly changing.
In conclusion, the S&P 500 having now confirmed a Head and Shoulders top pattern is certainly something that investors should take into consideration when evaluating the market. Although the market could still hold onto its gains, it is important to be mindful of the signs that a strong period of growth may be coming to an end. As such, investors should take appropriate steps to protect their investments in the face of a potential downturn.
