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The major averages (Dow, Nasdaq and S&P 500) have now completed the 2nd Shoulder of a bearish looking Head and Shoulders Top pattern which looks similar to what occurred in the Summer of 2002.

The Dow ran into strong resistance near its 200 Day Exponential Moving Average (EMA) around 8850 early last week which led to the development of its 2nd Shoulder.  By the end of the week the Dow had dropped back to its 50 Day EMA (green line) which was near 8600.  If the Dow is unable to hold support near its 50 Day EMA then the next major support area would be at its Neckline in association with its Head and Shoulders Top pattern near 8250.   

The Nasdaq ran into strong resistance early last week near its 200 Day EMA (blue line) near 1460 which allowed for the development of its 2nd Shoulder.  By the end of the week the Nasdaq had dropped below its 50 Day EMA (green line) near 1390.  If the Nasdaq continues lower the next major support is at its Neckline in association with its Head and Shoulders Top pattern in the 1320-1325 range.

The S&P 500 stalled out early last week just above the 930 level which led to the development of its 2nd Shoulder and by the end of the week had broken below its 50 Day EMA (green line) near 905.  If the S&P 500 continues lower the next major support area is at its Neckline in association with its Head and Shoulders Top pattern around 870.

Meanwhile the Semiconductor Index (SOX) is also exhibiting a bearish looking Head and Shoulders Top pattern as well.  The key level to watch in the SOX is around 285 which is the Neckline support area in association with its Head and Shoulders Top pattern.  If the SOX breaks below its Neckline then this will likely lead to a retest of its early October 2002 low near 210 (point A).

What is even more bothersome too me at this point is the amount of complacency and lack of fear being exhibited by a few of the Contrarian Indicators.  The % difference between the Bearish (point B) and Bullish (point C) Investment Advisors still shows a wide gap between the two which has existed for several weeks now. 

Furthermore the Volatility Index (VIX) still remains at a very low level (point D) and didn't rise much this past week despite the weakness in the market.

With the Contrarian Indicators showing an absence of fear in the market and the major averages exhibiting bearish looking Head and Shoulder Top patterns the potential for more downside pressure appears high.  The key thing to watch over the next week or two will be if the major averages can hold support near their Necklines which are 8250 (Dow), 1320-1325 (Nasdaq) and 870 (S&P 500).   

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