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The S&P 500 Is Either Forming a Topping Pattern or a Large Basing Pattern


If history repeats itself, the market will head lower as QE 3 ends.

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I've received quite a few questions recently from investors and the media asking what I think will happen if the market breaks below support.
Next Move Wins
The answer is simple: The market will head lower. An important trait to successfully navigating the stock market is learning how to analyze the facts and keep things simple. Most people tend to overthink what's staring them in the face and thus underperform by not trusting the tape or themselves. Keep in mind that if the market breaks out of its current trading range, then the large topping pattern will be negated, and it will be viewed as a large basing pattern within a larger uptrend. It's important to be flexible in your approach and be prepared for all possible outcomes.
Here Are The Facts
Remember that there are only three directions in which the market can move: up, down, or sideways. That's it. The bull market is aging. It just turned five years old in March, and the last two major bull markets topped out (ended) after turning five. The market is building a large topping process, which began in March (not a coincidence exactly on its five-year anniversary), and a ton of important areas of the market are under pressure or already in bear markets. Most importantly, the primary driver of this five-year bull market in equities has been easy money from the Federal Reserve. Don't believe me? Just look at this annotated chart.
Click to enlarge

Right now, the Fed is reducing quantitative easing (QE). The last two times QE ended, the S&P 500 (INDEXSP:.INX) dropped 17% and 21%, respectively. Right now, the Russell 2000 (INDEXRUSSELL:RUT) is flirting with support, which is the neckline of its head-and-shoulders top, and if it breaks, what do you think will happen?
Click to enlarge

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