Inverse Head & Shoulders on the S&P

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machinehead's picture
machinehead
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Inverse Head & Shoulders on the S&P

July's action in the S&P index has started to form an inverse head and shoulders pattern. On a 12-month chart of the index, such as the one linked below, the upside-down left shoulder (low point) occurred in late Nov '08; the head (lowest point) in early March '09; and the right shoulder (third low point) in early July '09. A neckline could be drawn at 950 (already crossed to the upside) or, more conservatively, at the 1,000 round number.

As the chart shows, after falling through 1,000 in early Oct '08, the S&P tried and failed three times in the succeeding weeks to retrace and break out beyond 1,000. So it would be significant if it were able to do so now, nine months later.

I'm not necessarily bullish, short-term. The time to buy was last November, or in March, when sentiment was so bleak. Now the market is a little overbought.

What I'm saying, though, is that if the S&P can make a sustained breakout past 1,000, the chances of retesting the Mar '09 low of 666 will become more remote. Up till now, I've called the probability of a retest about 50 percent. On a sustained breakout past 1,000, I'd lower the probability of retesting the bear-market low to 20 percent.

With both the monetary and fiscal accelerators nailed to the floor, don't underestimate the potential for the man behind the curtain to paint the tape. In a Greenspandian 'full fiat' system, 'they' control the horizontal and the vertical. The 'market' functions as their signaling device. 'Animal spirits,' as the late Maynard Keynes was wont to say. Though I'm not sure whether he was referring to the market, or his hots for some of the hunky mountain men hangin' around Bretton Woods.

Any resemblance of the 'market' to an investment is purely coincidental.

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=spx&sid=...

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Re: Inverse Head & Shoulders on the S&P

Hi Machinehead,

Thanks for the post. There has been a similar conversation going on in the weekly In Sessions thread (paid) the last few days. It does indeed look like that the bear market might be history soon. (I can't believe I just wrote that). Either that, or the "smart money" is doing a fantastic job selling us on a new bull market....Who knows at this point?

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Re: Inverse Head & Shoulders on the S&P

As there has been no level anywhere near the left hand shoulder (740-ish in November 2008) I don't buy the idea of an inverse head and shoulder, the right hand inverse shoulder low has been around 870. For a true inverse head and shoulder, the previous shoulder low would need to have been tested - which it hasn't.

I was talking with a non market interested friend of mine the other day and showed him the S&P chart - he said (totally unprompted!) the tight hand side looks like a man waving! Make of that what you will!

DavidC

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Re: Inverse Head & Shoulders on the S&P

Bulls have control

http://www.financialsense.com/editorials/swenlin/2009/0724.html

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Re: Inverse Head & Shoulders on the S&P

I'm not too sure about this head and shoulders thing , but the FED has a garage sale coming next week . Something like 115 Billion in notes !  http://www.bloomberg.com/apps/news?pid=20601009&sid=aQxMMRr8sy08

I wonder if the man behind the curtain wants the stock market down next week ?

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Re: Inverse Head & Shoulders on the S&P

I am giving up trying to read the stock market (not that I ever could) as it seems to be a "pump -n-dump" scam.  That said, I suspect that savvy investors like Machinehead can still make a buck.  But for me, market forces and logic just don't seem to matter.    

For example, Denninger has been on "High-Frequency Trading" which sure looks illegal to me.

What part did these systems play in the October and March meltdowns, along with the ramp job of the last two weeks? Specifically, were they stepping in front of orders in these cases, thereby dramatically amplifying market moves while skimming off their pennies?

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Re: Inverse Head & Shoulders on the S&P

Denninger is "Ticked" off because he walked into the bear trap. I'm sure there will be a corresponding "bull trap" to follow. Perhaps this huge inverse head and shoulders that is currently forming is it.

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Re: Inverse Head & Shoulders on the S&P

or perhaps this is a real bull market? One of the things inflation could do is inflate the stock market - are we not seeing that now?

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Re: Inverse Head & Shoulders on the S&P
paranoid wrote:

or perhaps this is a real bull market? One of the things inflation could do is inflate the stock market - are we not seeing that now?

If dollars are losing value and shares are valued in U.S. currency, are they really advancing? From inside the U.S., it may appear to be the case, but I can't imagine too many foreigners will be impressed.

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Re: Inverse Head & Shoulders on the S&P

The S&P reached 1,000 today -- the higher neckline mentioned in the original post. It's make or break time -- to reverse back down, or break out.

Positive news today included the ISM report. This is a private-sector report, and unlike government statistics, it is never revised later. Here's what the ISM had to say:

More leading components of the PMI — the New Orders and Production Indexes — rose significantly above 50 percent, thus setting an expectation for future growth in the sector. The Employment and Inventories Indexes are still contracting, but the rate is slowing and they are moving in the right direction. It is also worth noting that the New Export Orders Index shows growth following nine consecutive months of decline, suggesting that the global economy is recovering. Overall, it would be difficult to convince many manufacturers that we are on the brink of recovery, but the data suggests that we will see growth in the third quarter if the trends continue.

http://ism.ws/ISMReport/MfgROB.cfm

The negative news is that one of the most asinine goofballs on the face of the planet -- 'Doctor' Alan Greenspan -- said precisely the same thing the other day -- that we'll see growth in the third quarter.

So we are presented with an 'irresistible force meets immovable object' conundrum. When a wise man and the village idiot both take the same position, we common folks are left in perplexity. For now, I side with the ISM. Greenspan is probably benefitting from the 'stopped clock is right twice in a lifetime' phenomenon. As in, drunkenly throw a thousand darts toward the dartboard, and one will probably end up in the bullseye. No No-Bell prize for proving the law of averages!

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Re: Inverse Head & Shoulders on the S&P

MH - i see yer head and shoulders but i'm not sure.  There have been more traps in the last few years than true break outs.

JAG - you could be right and if this breaks it could be a bull trap.

When I look at the sentiment numbers it would suprise me to see a true breakout from here.

But, when I look at the price by volume on the s&p or the dow it looks like virtually no resistance for another quick 20-30%.

Looks like a perfect set up to kill either the bulls or bears (perhaps both)

fwiw i'm sitting 75% gold/silver stocks 15% gold/silver bullion, 10% cash

 

 

 

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Re: Inverse Head & Shoulders on the S&P

As specie says, sentiment IS worrisome. More on that below. Meanwhile, this week's action could be interpreted as an 'inverse head and shoulders' breakout past the 1,000 level on the S&P.

On a 5 or 10-day chart such as the one linked below, you can see that the S&P spent Monday through Thursday of the first trading week in August dancing around the 1,000 round number. Then on Friday, it moved decisively higher on the jobs report, ending one percent above the neckline at 1,010.

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=spx&sid=...

Of course, it would be a stronger signal if it spends more trading days above 1,000, and is able to rise higher. There are no sure things in technical analysis -- only a better-than-random chance of staying in gear with the trend.

During Friday's bullish romp, giddy commentators on the radio claimed, 'The recession ended in June or July; the third quarter will show positive GDP growth! Glory, glory hallelujah!'

Though it sounds like bullish propaganda, and it is, I would not dismiss this celebratory claim out of hand. We live in an entirely manipulated fiat currency system. The authorities have opened the monetary and fiscal spigots to Niagara Falls proportions. Now they're going to crank auto sales with the highly-publicized clunker rebates. And so forth.

Moreover, although the 'official' recession dating by the NBER is universally accepted as gospel, it is merely a 'technical analysis' judgment by a committee. If the NBER retroactively declares that the recession ended in June (which sounds plausible to me), their declaration has no more scientific validity than my identification of an inverse head-and-shoulders breakout. As the discussion above indicates, some agree, some don't; others don't even think it's an inverse head and shoulders. And the NBER won't admit that they're just a bunch of grey-bearded TA-ers.

Sentiment-wise, after 18 months of unrelieved gloom punctuated by moments of sheer terror, lots of folks are 'sick and tired of feeling sick and tired.' Positive thinking doesn't produce any more widgets. But it can motivate those with credit to go on a splurge. We DESERVE a new car after all we've been through -- don't you think?

All of this manipulation won't save the system in the long run. In fact, it's probably counterproductive, leading to more malinvestment. But it does not pay to disbelieve the authorities' ability to produce a vigorous cyclical pop, if they so direct. And the evidence suggests that they have.

Happy motoring, comrades ...

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Re: Inverse Head & Shoulders on the S&P

As MH says, when you're dealing with fiat with little restriciton on it's creation, anything can happen.  Back to the ideas about traps.  It has been my experience that traps are being created more frequently.  Without lookiing it up, I would guess that most of the most important traps have occurred on Job's Fridays or Mondays that follow a jobs Friday.

As a borker with twenty some years experience I've learned that markets are made up of people.  I have accumulated a few clients that are true bell ringers.  In the last few days I have had a few of my key risk averse canaries start to sing loudly about not having enough stock exposure.

As far as I am concerned, the light is yellow.  And my foot is off the gas and heading for the brake.

 

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Re: Inverse Head & Shoulders on the S&P
specie wrote:

As MH says, when you're dealing with fiat with little restriciton on it's creation, anything can happen.  Back to the ideas about traps.  It has been my experience that traps are being created more frequently.  Without lookiing it up, I would guess that most of the most important traps have occurred on Job's Fridays or Mondays that follow a jobs Friday.

As a borker with twenty some years experience I've learned that markets are made up of people.  I have accumulated a few clients that are true bell ringers.  In the last few days I have had a few of my key risk averse canaries start to sing loudly about not having enough stock exposure.

As far as I am concerned, the light is yellow.  And my foot is off the gas and heading for the brake.

 

Watch the volume, as I wonder how much money is really on the sidelines waiting to come in?

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Re: Inverse Head & Shoulders on the S&P

Here is a link to some commentary on sentiment by Guy Lerner, an analyst I respect. His views echo what specie said about a sudden surge in bullish sentiment:

Investor sentiment is extremely bullish as the "Dumb Money" indicator has registered its second most extreme reading ever. The current value is only less than the value seen in May, 2003, which was at the start of the last bull market.

The bulls remain in control, and despite the bullish extremes in investor sentiment, it will likely be some time before the market rolls over. There may be a lot of believers, and in general, this is not good for higher prices, but these buyers won't give up so easily. As I am not one to chase prices higher, I would still wait for a more risk adjusted entry.

 

http://www.safehaven.com/article-14134.htm

Despite what looks like excessive bullishness, the last such spike in bullishness in May 2003 did not turn out to be a contrarian sell signal. Stocks stagnated for awhile. But there were still four years of gains left.

Like Guy Lerner, I wouldn't be doing any short-term buying right here, when the bullish story has suddenly become popular. But at the same time, those awaiting a retest of the March 2009 lows may be waiting a long time. If they aren't retested this fall -- and I'd put only a 20% probability on that happening -- they may not be seen again. Because the value of fiat currency is headed for a serious decline. Cut the purchasing power of the dollar in half, and stocks at S&P 2,000 would buy no more goods and services than S&P 1,000 does today.

Stocks are paper denominated in other paper. Beware of money illusion.

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Re: Inverse Head & Shoulders on the S&P

While this may be signaling a "2003" moment, there are a couple of differences too...

This is the most extreme reading on the chart, and the bottom-to-top move is also without parallel.  I wonder if perhaps this doesn't indicate that sentiment has gone "too far, too fast" possibly as a snap-back moment in the collective psychology of a people long conditioned to expect immediate gratification.

"This has to be over because I am tired of it!"

At any rate, this is a quite bizarre move in the face of the actual data being released right now.  Yes, we are still losing (not gaining) jobs, house foreclosures are setting records, bankruptcies are on the rise and wages/income is falling at the fastest pace on record  while sales and income tax receipts are still plummeting.

This gets translated into the highest bullish percent reading over the last 12 years? At least in 2003 many of those indicators had solidly turned the corner.

"But stocks are rising, I'm bullish!!"

A strange situation indeed.

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Re: Inverse Head & Shoulders on the S&P

I spent the weekend studying the current market sentiment indicators, and though some of them are in extreme territory, like the Equity-Only Put/Call ratio (twice as many call options as put options), overall I don't see the type of extreme bullishness that is necessary to end a rally of this magnitude. There are some signs of excessive speculation in the Rydex funds, but not to the level that has me standing up and shouting, yet. The only sentiment that seems truly extreme at this point is the ubiquitous bearish sentiment for the USD. 

During this rally, the dumb money has been very quick to jump on-board the shorting bandwagon at any sign of weakness. No doubt many of them lost serious money in the short squeeze that ignited the second phase of this rally. IMO, its going to take another significant short squeeze (or maybe two) to get the dumb money to hesitate on shorting this market at the first sign of weakness. As I have stated previously in the paid-section of these forums, I don't think this rally will end until we see a new record capital outflow of the Rydex/Proshare Bear (inverse) Funds/ETFs. 

I have been concerned for sometime that this rally was 2003 all over again (i.e. a new bull market), but how often do you see a crash of 08's proportion be technically composed of a single leg down? Not very often (1987?).  

Bottomline: If the smart money (i.e. the OEX traders in general, and Goldman Sachs specifically) is going to profit on the next leg down in this bear market, and they always do, then mom & pop need to get a lot more bullish than they presently are. With the current market momentum, and the copious amounts of cheerleading regarding the economy in the MSM, this process may not take as long as I have recently thought. All it would take is a strong September/October market performance (short squeeze) and you wouldn't find a bear anywhere in the dumb money crowd.

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Re: Inverse Head & Shoulders on the S&P

Hi chris,

Double check the Bullish Percentage indicator.  As I recall it is based solely on prices of stocks and has little to do with investor sentiment.

 

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Inverse Head & Shoulders on the S&P - Huh?

Head and shoulders?  Mortise and tenon?  Flying Vee (wait, that was a guitar)

Who cares?

If the price of a stock is moving, trade it - both directions, calls and naked puts up, puts and naked calls down.

Don't waste trading opportunity trying to classify what the market "looks" like.  Trade what the market is giving you - and trust me, the market has been giving a lot lately.  The OEX has been a very lucrative cash cow lately and not once have I cared about left, shoulder, right shoulder nonsense.  Leave that to the talking heads on CNBC to yammer about.

Market neutrality is the only correct approach to the market these days.  Take what it gives you, not what you want it to give you.  It's easier to make money in a Bear market than a Bull market - if you trade the direction the market is moving and you divorce your thinking from what the "professionals" would have you believe.

After all, if they were really good at making money for their clients, why do they have a job in the first place?

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Re: Inverse Head & Shoulders on the S&P

Oops.  Right you are.  I was thinking of a different one.  This one only refers to the bullish set ups of individual stocks by P&F chart.

Thx.
Chris

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Long Term Buy Signal Approaching

 From Nate's Blog,

This cross produces very few false signals and when the mandatory 1% pad is thrown in is almost perfect over time. It is meant to be very mechanical, to remove emotion and to remove analytics. The tape, as they say, does not care what YOU think the fundamentals are.

 

At least that’s how it’s supposed to work in theory, and I have used this signal in the past to my advantage, for sure. However, the resonant disconnect between the fundamentals and price make this juncture a very dangerous one in my opinion. I am of the belief that any further rally in the marketplace is purely based on printed money and NOT on fundamental growth. Our debts on all levels are parabolic and completely out of control. The actions to stimulate the economy have made the underlying fundamentals WORSE, not better.

 

For example, it took $1.50 of debt to generate $1 of GDP in the 1960s, $1.70 to generate $1 of GDP in the '70s, $2.90 in the '80s, $3.20 in the '90s, and an unbelievable $5.40 of debt to generate $1 of GDP in the latest decade. With the velocity of money CRASHING, the debt is rising exponentially in a desperate attempt to keep impossible never ending growth alive. THIS WILL FAIL, and it will fail miserably.

Link

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The Biggest Head & Shoulders Pattern in History?

 From Nates post that I linked to above:

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Re: Inverse Head & Shoulders on the S&P

Just a brief note -- with the Dow closing near 9,800 today, Dow 10,000 becomes the obvious next technical target.

With stocks being so overbought, they are likely to run into resistance at or before 'Dow Ten Thou.'

In the unlikely event that stocks just power through Dow 10K like a chain saw through butter, then look out -- Bubble III has arrived, earlier than anybody woulda thunk. And the Queen will knight 'Sir Ben' for saving the world economy.

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