S&P 500 Forming Head & Shoulder Pattern?
Trader’s Narrative sends along this chart:
Here’s their explanation:
Head and shoulder formations are one of the most fundamental technical patterns. They are arguably one of the easiest to recognize on a chart and are almost always found at turning points in price. Right now we are seeing the S&P 500 Index (SPX) carving out what looks to be the right side of a head and shoulder formation.
The defining element of this patterns is not only the striking silhouette it leaves behind on price charts but also the volume that accompanies it. For downtrending reversals, like this one, we want to see heavy volume come in as the right shoulder is created. Ideally, a burst of activity both in price expansion and volume cements the pattern as it decisively breaks through the neckline.
January 28th, 2009 at 11:07 am
If I recall correctly, as a topping formation, shouldn’t the “ideal” head and shoulders pattern have the right shoulder LOWER than the left shoulder (i.e. not enough momentum to get past the first shoulder, let alone the head, indicating an imminent breakdown). Therefore, as a bottoming pattern, the right shoulder should not be lower than the left shoulder to indicate certain upside movement. I’m not a professional technical analysis but I wish I could play one on TV, so I may be wrong =)
January 28th, 2009 at 11:21 am
The left shoulder should be lower than than right shoulder and then a head should form. From there, you want to look for a “football-like” stance, which indicates that the chart is ready to magically CHARGE higher.
January 28th, 2009 at 11:21 am
Trader’s Narrative should have used “Inverse Head and Shoulders” in their headline. Anyway, I would not read too much into it unless SPX strongly breaks above 915.
January 28th, 2009 at 11:29 am
I assume 915 considered the neckline.
January 28th, 2009 at 11:30 am
tea reading nonsense.
January 28th, 2009 at 11:42 am
it would be an inverse head and shoulders as indicated by toneybrooks. I’ve said before and I will say again- if everyone is reading the same info and looking at the same charts doesn’t that create a reason for everyone to charge ahead and create “out of thin air” a buying opportunity as opposed to looking at the findamentals- such as everyone is losing their job and no-one has any money so the economy has nowhere to go but down and equities have nowhere to go but lower
January 28th, 2009 at 11:47 am
> tea reading nonsense.
I wouldn’t say that TA has any predictive ability per se, but ignore it at your peril. Unlike a physical science, trading markets IS essentially alchemy. If enough people believe something and bet accordingly, then it DOES affect the outcome. As such, it’s always good to be aware of resistance, support, flags, head and shoulders, etc.
To be fair, if TA is reading tea leaves, then what the heck are analyst reports? Aren’t projected cash flow, net present value, price to future earnings ratios just as, if not even more bullshit-ty?
Cheers,
HCF
January 28th, 2009 at 11:59 am
It seems relatively trivial to design a double-blind study to test this correlation, using the available historical data (be sure to have different people decide where the “price turning points” and the “head-and-shoulders patterns” are). Has such a study been done?
January 28th, 2009 at 12:00 pm
One would wonder whether or not this trend is accomodating the actions Bernanke might start to take on the long end of the T-bills, which if it happens I would guess would pull that right arm off at the shoulder and beat it around the head with it.
January 28th, 2009 at 12:02 pm
…… then again, folks seem to desparate for positive signs in the market, that they may just pretend the Ben is Fed Chief on a another planet and just buy into any Fed action anyway.
January 28th, 2009 at 12:03 pm
Anyone who seriously considers anything a Wall Street analyst says is a blithering idiot. Wow, lets all get excited because through some bogus financial engineering a company beats expectqtions when in fact about 75% of all companies always bet expectations. It is a shell game to run up prices and whether it is so-called fundamentals or TA its object is always the same….buy something.;…Carl
January 28th, 2009 at 12:04 pm
If it is an inverse H&S formation, it won’t last long. The most bullish outcome will still require a restest of 750, IMO.
After Obama gets his “stimulus” plan passed, and a huge bank bailout plan passed, that should be the “high water mark” for a while.
January 28th, 2009 at 12:12 pm
HCF Says:
“If enough people believe something and bet accordingly, then it DOES affect the outcome”
Exactly! The TA folks are all acting on conventional wisdom regarding technical charts- they “create” their own buying/selling windows based on this nonsense- BECAUSE “they believe” and all act accordingly they perpetuate what really is “tea reading nonsense” as indicated so eloquently by ‘retrogrouch’.
January 28th, 2009 at 12:25 pm
That “Head and Shoulders” stuff is flakey. Use Selsun Blue.
Agree with ahab, TA is useful for understanding what the TAers are going to do. That’s about all.
January 28th, 2009 at 12:38 pm
> BECAUSE “they believe” and all act accordingly they perpetuate what really is “tea reading nonsense”
I’m not 100% in agreement with you. I think we would have to study what % of assets under management are controlled by people employing TA as a primary decision making tool. I’m pretty sure it’s well under 50%, so the effect should be muted. Almost all MF managers seem to proclaim things like “I don’t even read charts, I only look at fundamentals!” Either that’s the truth or else they are all hiding in their closets secretly looking at their charts as if it were porn.
HCF
January 28th, 2009 at 12:46 pm
Broken @ 12:25
Yes, but technical analysts are not a monolithic group. There is no agreement that an inverse H&S formation even exists; so how can they all act as if it did?
January 28th, 2009 at 1:02 pm
If you only use fundamentals then you have to be out of the market for a long time. If you want to trade in the mean time and try to make some money you have to use TA. If I may speak for BR he is not exclusively using TA to trade but a fusion of TA, quantitative analysis and fundamentals. Hence Fusion IQ.
January 28th, 2009 at 1:07 pm
imo the markets are in trouble
we live in a new age of information for all
the have-not’s have seen the world in a new light
the structure of paying the have’s must be fixed 1st
we all know the body needs a head – but the head needs a body more
January 28th, 2009 at 1:13 pm
This sort of “technical analysis” seems nothing more than a Rorsachs Test of the trader’s mindset.
January 28th, 2009 at 1:29 pm
So your prediction is for less dandruff?
January 28th, 2009 at 1:30 pm
Yeah, TA is totally worthless… no one should bother with it.
January 28th, 2009 at 1:34 pm
This chart has produced an excellent discussion of TA.
If one accepts, as do I, that the market is a non-linear, chaotic and co-creative system. Discernible patterns (order) occur and reoccur, i.e. cycles and may be predicted. A good TA cannot focus solely on charts, however. Historical perspective is requisite, as is good old-fashioned intuition. TA can render one tone deaf, a bad thing.
Frankly, I doubt an inverse head and shoulders pattern will emerge. This is a sideways market for now. Intuitively, I do expect a test of the November lows (the chart’s neck) before another bear market dead cat rally possibly to SPX 1000. I’ve seen no conclusive TA to suggest otherwise, but I’m often wrong and I distrust a market with such little respect for fundamentals and mood — too much chaos, not enough order.
January 28th, 2009 at 1:49 pm
@SWMOD52 :
You are right! Very good observation. I have been all cash since Spring 2007 (went to China and a few other places and was out of the loop and put everything into cash). When I came back September 2007 the markets looked a bit scary to me with too much potential for an outright crash so I left everything in cash. However I have made a few bucks the last few months trading volatile stocks such AAP L and GOOG (very quick trades). I am always open to how to make $$$ however. Is TA the way to go? My own impression is that TA is up there with wishful thinking- however maybe I need to get a book on it if it would reinforce an exit and entry points. I still can’t get it out of my head however that past patterns are not representative of the present.
January 28th, 2009 at 2:15 pm
AT, 875 seems like a critical level today. I am also bearish here up to about 890.
It seems like profit taking is likely to ensue here in the XLF on the slightest negativity.
Set up very very short here but with tight stops overhead as we could run up to 905 on a decent move.
If Bernanke shows an actual photo of the printing press in the FOMC release, banks and gold might rally….
January 28th, 2009 at 2:21 pm
@ Resistance/Support 870.
Strong resistance @ 903.
Then again @ 936.
Still stick to my 741 – 1003 trading range for 2009 posted weeks ago. Today we are smack dab in the middle of that range.
January 28th, 2009 at 2:51 pm
The Key to Head Shoulders Formations are figuring out where the actual neckline is and when does it break the shoulder. Also, the break of the neckline usually comes back and tests the neck….if that holds, THEN, and only then, do you have a confirmed pattern.
I can’t tell you how many “almost” head and shoulders patterns I’ve seen….
leftback. small time short right now…it’s a position I’m willing to ride with a wider stop. I haven’t see a development yet to make me big time bearish, just yet.
Real short term, it seems a bit overbought….
As we get closer to 900, I think we will see A LOT of selling pressure.
January 28th, 2009 at 2:57 pm
If you look at the volume chart between October and November….
The signal that the market gives is a big, audacious Flip of the Bird.
January 28th, 2009 at 3:01 pm
AT:
I am short the banks and the NAZ, still have a few materials and miners longs but I am net short here.
One eye on Treasuries right now to see if there is a run for safety as the afternoon progresses.
No TBT or GLD right now, not until the $ rallies significantly again.
January 28th, 2009 at 3:25 pm
I am a believer in the fused method of TA and fundamentals, but in this environment I think any system that uses previous data patterns is useless. The Fed, Treasury, Congress, President, even individual companies keep throwing curve balls on a daily basis, so TA patterns get washed out and fundamentals turn out to be based on fallacies. I think day traders are the only ones making money, since each day seems to have a pretty specific trend but it’s hard to guess how to add those individual trends together over several weeks.
January 28th, 2009 at 3:28 pm
@ Dan Duncan:
So . . . the “flip of the bird”- is that a buying or selling opportunity? Can we expect it again in the near future?
January 28th, 2009 at 3:49 pm
Are you sure it’s not the market giving us the finger? Anyway, we approached 968 during the first week of January…and haven’t looked back since. My current trading range is 752.44 to 968.75 (based on my three line break chart). Until either one of these price levels are breached the current trend is still intact. I still think that TA is for short/near term analysis and fundamentals are used for a longer term analysis.
January 28th, 2009 at 3:52 pm
and using Western TA we need to close above 894 to break the trend line (down).
January 28th, 2009 at 4:25 pm
TA is definitely taking on more importance because fundamentals have less visibility. Many companies are giving no guidance moving forward. Everybody is a trader these days. IMHO
January 28th, 2009 at 4:33 pm
@ Broken
Todays run-up was on hope. “Stimulus Hope”
One old and simple rule… “the trend is your friend”. Trade it until it breaks. Then apply, rinse, repeat.
January 28th, 2009 at 6:08 pm
the only head and shoulders pattern I see is a bullish head of barry
and his 2 big , broad shoulders.
Barry must be bullish today.
January 28th, 2009 at 6:09 pm
Since this is a TA thread…
today marked the 44th straight trading day QQQQ volume was at or below its 100 day MA. A similar period last March-June was followed by total disaster for longs.
The 10 day equity put/call is in a tricky situation here…if the market is strong the next two days, it will drop right back to a possible double bottom at multi-year lows.
January 28th, 2009 at 8:24 pm
It’s not an inverse head and shoulders until it breaks out. until then, it’s congestion or consolidation. I rely on TA but it doesn’t predict anything. It identifies higher probability entry and exit points for overbought and oversold reversals, and defines the presence and absence of trends. Anyone looking for the future in the past should buy a crystal ball. there is no certainty and the markets can do anything. For every potential H&S pattern you can show me, I can dig up a hundred charts that didn’t break out, but fell back into bases or choppy trading ranges or resumed the previous trending direction. if it breaks above the neckline, and holds that break. if it does it on volume, and if the trend indicators confirm, I’ll accept it and act on it.
January 28th, 2009 at 8:45 pm
@tk…you are very correct…and this pattern is all on light volume. I’d much rather use sentiment indicators like put/calls and short interest levels. The only chart patterns I look at are multi-year patterns…I do like TA for resistance and support levels when timing a buy or sell…but then I haven’t traded in almost 2 years.
January 28th, 2009 at 10:30 pm
@ Ken
Re: empirical research on “head and shoulders” pattern:
http://web.mit.edu/alo/www/Papers/1705-1765.pdf
OK, I found it for you. Now you tell me what it means.
January 28th, 2009 at 11:16 pm
it amazes me how 10 different people can look at the same chart and all 10 see different patterns. anyone see the hopper handle formation forming that would dictate a decline to around 450 in the s+p?
January 29th, 2009 at 12:11 am
If banks are successful through representative agents Geithner/Paulson to unload their debt on others, the stock market will view that like a victory won’t they? … Be like a frat having a 20-keg party. Fed creates a shell entity to receive toxic assets, but pays a premium for the toxic assets. Then banks sell their debt at .80 cents on the dollar? Holy smoke! No wonder they half jokingly call it a bad bank.
Fed does not foreclose on banks that are friendly with Geithner/Paulson. Collects the toxic assets in one location, and bundles them like mortgages originated by another lender. Bundles were sold to a sucker client at a premium (good for them), with a derivative enabling a big mark-up (good for them), competitor banks and other banks begin to fail/are acquired (good for them), bad debt is written off against profits providing tax benefits on that toxic part they had to re-acquire (good for them); and then those same toxic assets are sold again (good for them):
Debts are re-sold to government for .80 cents on the dollar (good for them). Government poses as another sucker-buyer, even greater sucker than the first sucker. Paying .80 cents on the dollar? (Good for them.) No private entity would pay that much for those assets.
Government buyer waits so they can take write downs and benefit by not paying tax on those assets. Approximate .30-.35 cents on the dollar tax benefit, claimed against taxes otherwise owed.
Bad bank hanky-panky, is the first step needed to escape accountability for having done anything wrong. Not out of that woods completely, but after a bad bank entity is created and implemented, the chances of sweeping accountability dwindle; leaving only a few to take the hatchet (who will probably get off lightly in the future if at all).
Suffice to say, if they get this, they are one step closer to evading scrutiny and accountability.
This is akin to a coup isn’t it? A financial Coup d’état. …allows them to consolidate their positions, obtain acquiescence of the populace (or the surrender of the government’s charter to protect them), and survive the conflict in a refortified manner.
Thats a huge win for the top 2 percent. I know its like cheating in monopoly, but the market could rally on that for some time couldn’t it? I mean the floor traders will be celebrating that around the world.
January 29th, 2009 at 12:22 am
And government will be free to focus on fubar-foreign policy again. Let Obama and the common repaint some school buildings. Drink up lads. Be sure to use condoms.
January 30th, 2009 at 12:20 am
Worst… Head and Shoulder… pattern… ever
January 30th, 2009 at 12:25 am
Funny how the SPX double top never got any play on the blogosphere but now a sketchy H&S pattern is seeing a lot of words.