Another head and shoulders pattern to watch

A couple of posts ago I warned of the impending failure of the much advertised bearish head and shoulders pattern on the daily S&P chart. The neckline was broken, but the market rebounded quickly and started a large rally. I pointed out that the pattern was too obvious.

However, there is a much less advertised bullish inverse head and shoulders pattern on the weekly S&P chart, with a break of the neckline occurring as of the close last week. You can see how nicely the double stochastic in the lower sub-graph indicated the reversal points. The daily action on the indexes seem quite bullish, as every attempt at a sell-off is met with buying. And every down day seems to reverse in the last part of the day with a close near the highs. Although it does seem like the daily chart is a bit extended short term. Since that pattern of late buying is starting to get a lot of attention, it might be that we’ll get a day of the opposite happening soon. And a little hesitation around the neckline break would be fine and could relieve the daily overextended condition. I say overextended rather than overbought. It doesn’t appear that the market is really overbought as it is still at depressed levels. It just seems that the persistent number of up candles is not sustainable. Markets need a little more back and forth action. They have to breath.

The market does seem to be following an inverse relationship to the Obama poll numbers. The lower they go the less likely many of the socialist ideas this administration has planned for the country will materialize. If cap ‘n tax and socialized health care get rammed through congress, then all bets are off on the upside. A major fundamental shift in the direction of the country will overrule any and all technical patterns or indicators. However then can help detect those changes. Technical patterns and indicators don’t drive the markets. Fundamentals do. The technicals just help measure and interpret.

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