The S&P 500 Is Forming a “Double Top”

Stocks opened for a big gain this morning before giving up almost all their returns by noon. Dow components overachieved, lifting the S&P 500 while the Nasdaq Composite sunk for a small loss.

Reopening hopes caused energy and travel stocks to rise the most. Increased vaccinations, a decline in Covid cases, and strong manufacturing data out of Europe had bulls initially feeling confident.

But they weren’t able to spur on a breakout past the market’s all-time highs. The S&P almost did shortly after today’s open. Same with the Dow.

A few hours later, however, and all three major indexes retreated significantly. Now, the market seems to be forming a dreaded “double top” – a technical trading pattern that often precedes bearish trend reversals.

It’s an inauspicious sign to be sure of it. Especially after stocks were ripped down from a big open, courtesy of red-hot futures trading.

But it’s not a true double top quite yet. The S&P needs to head lower from here to confirm the formation. Otherwise, it might just be a short hiccup en route to a longer rally continuation.

Chris Hussey, a managing director at Goldman Sachs, believes that’s exactly what’s about to unfold following last week’s inflation scare.

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“Overall, given the market’s reaction to [Friday]’s PCE release, investor concerns about inflation may have been exaggerated — or perhaps already priced in,” Hussey said in a note.

“Consensus may be building that the inflation we are seeing today is ‘good’ inflation — the kind of rise in prices that accompanies accelerating growth, not a monetary policy mistake.”

This was before today’s noon hangover. I wonder if Hussey has changed his tune at all.

Thankfully, we can try and predict the S&P’s future movement without the help of a Wall Street money manager. Tech stocks have ultimately driven equities higher for over a decade. It’s the market’s best performing sector, home to many companies that enjoyed staggering “moonshot” bull runs.

Even Tesla (NASDAQ: TSLA), which has sold off considerably in recent months, is still up over 600% since January 2020. FAANG stocks have exceedingly well, too.

Wall Street has long called for a rotation out of growth stocks (like those in the tech sector) and into value. And, that’s more or less been the case over the last two months.

In the coming weeks, however, the flip to value might intensify as a tech sell-off looms.

The tech sector, as represented by the SDPR Tech ETF (NYSE: XLK), formed a double top of its own back in late April. It eventually broke support, diving lower through mid-May before recovering.

Over the last week, though, the XLK looks like it stalled. It may have set a lower high in doing so. The ETF also dipped below support temporarily.

If tech drops again, it may very well take the S&P with it. The Dow is doing its darndest to keep the market afloat, but another growth stock slump might be enough to sink equities, which are already facing a bearish reversal with their double top. Tech’s lower high – also bearish – should only make matters worse if the sector trades beneath recent support.

So, as usual, until there’s a major breakout to new highs, bears remain very much still “in the game.” And at this point, given the evidence on the charts, I’d say they’re about to see things swing into their favor once more.

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