Is That an Inverse…?

I recently read an article by one analyst suggesting the S&P 500 could be forming a Head and Shoulders pattern. If it completes the pattern and follows through in the typical manner, the analyst reasoned, we could see a market drop matching the height of the pattern.

If the S&P 500 breaks below the bottom of the Head and Shoulders pattern, that slightly up-trending orange trendline below, then we can expect a drop similar to the height of the H&S pattern. So 1950 could be a target.

Well, that may be a Head and Shoulders pattern, and it may break to the downside, and may drop a 100 points or so. In my opinion, the volume pattern doesn't point to a high probability H&S pattern with follow-through.

A good H&S pattern will set the left shoulder on strong volume. After a slight pullback, the stock (or index or ETF) marches to a new high – the ‘head'. But the volume should be lower, as the conviction of the bulls has decreased. While the sellers haven't stepped in yet, the number of buyers should be decreasing, hence the lower volume. The sellers finally step in and bring the stock down to the area of the previous pullback. They take their profits and let the optimists again bid up the stock.

This time however, the buyers don't seem to have much company. The buying quickly peaks, forming the right shoulder.  Typically, the volume will drop off just as the right shoulder peaks and will be less than the volume of the previous two peaks. Following the peak, the volume may actually pick up as the stock drops back from the right shoulder.

If the stock breaks the trendline formed by the two pullbacks, astute traders watching this price pattern and the volume patterns develop will jump into short positions, betting the stock will fall farther. They will look to take profits when the drop from the trendline matches the distance from the trendline to the head.

Now when I look at the above chart I don't see much change in volume as this pattern was forming. So at first I didn't place much importance on this setup. We may see a break below the pattern base, but at least based on just this chart, I didn't think it would amount to much.

But wait, isn't there an ‘inverse' form of the Head and Shoulders pattern? When flipped over, the inverse Head and Shoulders pattern can signal an important bottom.

Let's take a look at the S&P 500 chart again. If we step back and zoom out a little, we see a drop into a low (a couple of lows actually) on high volume. Then in January/February we see another drop, and a bit lower this time. Volume is strong on down-days going into the low, but quickly subsides. Strong volume accompanies some of the up-close days coming off the possible ‘head'.

The S&P 500 has now returned to previous resistance. Is this the base of an inverse Head and Shoulders pattern? If so, the index is likely to fall farther, perhaps forming the right shoulder.

If the inverse H&S pattern indeed does form, and follows through as it should, then we could see a 15% gain of a breakout above the base of the pattern. This would be in the area of 2450 for the S&P.

It may be hard to envision that, after recent economic news and earnings releases. But if foreign markets weaken further, the U.S. may look like the best investment environment on a relative basis – the best table in the casino. So after a near-term pullback (to form the ‘right shoulder'), we could see a significant rally. That analyst with his Head and Shoulders outlook may not be thinking big enough. I'll have to come back in several months and update this article on how it turned out – just the small H&S, a bigger inverse H&S, or none of the above (a curveball we didn't see coming).

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link: www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2016 Stock & Options Training LLC

Gregg Harris is the Chief Technical Strategist at MarketTamer.com.

MarketTamer is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of MarketTamer are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.

The sender of this email makes no representations or warranties concerning the products, practices or procedures of any company or entity mentioned or recommended in this email, and makes no representations or warranties concerning said company or entity’s compliance with applicable laws and regulations, including, but not limited to, regulations promulgated by the SEC or the CFTC. The sender of this email may receive a portion of the proceeds from the sale of any products or services offered by a company or entity mentioned or recommended in this email. The recipient of this email assumes responsibility for conducting its own due diligence on the aforementioned company or entity and assumes full responsibility, and releases the sender from liability, for any purchase or order made from any company or entity mentioned or recommended in this email.

The content on any of MarketTamer websites, products or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options and other securities involves risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities is not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/about/publications/character-risks.jsp). The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.

The information presented in this site is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing in our research constitutes legal, accounting or tax advice or individually tailored investment advice. Our research is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive or obtain access to it. Our research is based on sources that we believe to be reliable. However, we do not make any representation or warranty, expressed or implied, as to the accuracy of our research, the completeness, or correctness or make any guarantee or other promise as to any results that may be obtained from using our research. To the maximum extent permitted by law, neither we, any of our affiliates, nor any other person, shall have any liability whatsoever to any person for any loss or expense, whether direct, indirect, consequential, incidental or otherwise, arising from or relating in any way to any use of or reliance on our research or the information contained therein. Some discussions contain forward looking statements which are based on current expectations and differences can be expected. All of our research, including the estimates, opinions and information contained therein, reflects our judgment as of the publication or other dissemination date of the research and is subject to change without notice. Further, we expressly disclaim any responsibility to update such research. Investing involves substantial risk. Past performance is not a guarantee of future results, and a loss of original capital may occur. No one receiving or accessing our research should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any applicable prospectuses, press releases, reports and other public filings of the issuer of any securities being considered. None of the information presented should be construed as an offer to sell or buy any particular security. As always, use your best judgment when investing.

Past performance is no guarantee of future performance. This product is for educational purposes only. Practical application of the products herein are at your own risk and MarketTamer.com, its partners, representatives and employees assume no responsibility or liability for any use or mis-use of the product. Please contact your financial advisor for specific financial advice tailored to your personal circumstances. Any trades shown are hypothetical example and do not represent actual trades. Actual results may differ. Nothing here in constitutes a recommendation respecting the particular security illustrated.

Related Posts