Head & Shoulders or Earnings

Editor's Note:

Which will break first, the bearish head-and-shoulders pattern on the S&P 500 index or the second quarter earnings season. The index has been trading sideways for the last couple of months as investors wait for better economic news and evidence from corporations that business conditions are improving. The best evidence is earnings.

The next few weeks could be volatile for the market and the path of least resistance is currently down. It is not a great environment to launch new long-term LEAPS positions. I am going to echo what I said in the watch list this weekend. After looking through hundreds of stocks there was nothing that looked attractive at least not in the shadow of a potential breakdown in the S&P 500 index.

Think about it. If you were a money manager would you want to open positions here at 900 or at 850 or even 800? A drop to 850 is a 5% correction from today's levels. A drop toward 800 about 10%. We should be patient and watch these next three or four weeks as an opportunity to launch plays that will take us through the fourth quarter and beyond.

Chart of the S&P 500 index: