Monday, July 6, 2009

Head And Shoulders On S&P 500 Index

That's what every trader, amateur or professional, has been watching for some time, probably ever since the index bounced off 888 on June 23, completing the "head" part. Many people have been very anxious to short the market, and now they have "the right shoulder" complete.

The head and shoulders formation is a bearish chart pattern. It is expected to break down at the neckline, which is where the index is at right now. According to Q-man at, since so many traders (including him) think (and want) it's going to break down from there, it will eventually break down.

But the stock market doesn't always comply with the majority's wishes. One good example was the market's advance AFTER the initial V-shape bounce in March. From April to June, the market kept going up, albeit at a much slower pace, frustrating lots of traders who went short the market at the end of March.

Now the long-awaited "head and shoulders" has materialized! Time to short? Maybe. Maybe not. I am personally neutral, mainly because of the green circles that I put in the chart. During the whole period in which this head and shoulders formed, the candlesticks that usually signal a trend change - hammer, hangman, doji - did signal a trend change. And today we had a hangman, with the shadow touching the 200-DMA. Slow stochastics could be interpreted as positive divergence.

Of course it doesn't need to go up again, and the index can break down right here, right now. Then it will be one of those few cases where the majority is right.

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