Academic research on the H&S pattern

Peer-reviewed research verifies the legitimacy of the H&S pattern

Increasingly I hear the argument that classical charting represents voodoo market analysis — that modern technology along with quant and HFT trading have left classical charting principles in the dark ages.

Let me make one thing perfectly clear — all neo-intellectuals are entitled to their opinions.

With that background, following is a slightly dated (yet still applicable) peer-reviewed research study from respected and credentialed academics on the head and shoulders pattern.

[Note: This study aside, I can persuasively take either side of the argument on whether chart patterns are predictive. This argument misses the point entirely . The question is whether chart patterns can provide traders with an “edge,” and the answer to this question is YES. The distinction between “predictability” and “edge” is one many self-proclaimed market “scholars” do not understand. This is why analysts are absolutely out of their league when criticizing methods traders use to obtain an edge.]

[scribd id=97919786 key=key-ecou6s1gc4qc27nqjsx mode=list]

 

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Nasdaq set up for a major buy signal

Nasdaq chart can be interpreted as extremely constructive

 This post presents a POSSIBILITY, NOT A PROBABILITY OR CERTAINTY

 I have written extensively how chart tend to morph over time, one possible pattern morphing into the next and the next and the next, until at last a market is ready to declare itself. Even when a trader thinks a chart is ready to declare itself, further (sometimes extensive) morphing may follow.

 Well, the Nasdaq chart is at a point of possible declaration. Presently the analysis below is my preferred interpretation – until future morphing makes me change my mind.

 Consider the following analysis:

On the monthly graph, the rally in January 2012 confirmed a possible 10-year double or failure bottom. The target of this pattern is 3450.

 

 The weekly chart can be viewed as follows:

 

  • The rally in late January completed an 11-month complex continuation H&S on the weekly graph.
  • The initial target of 2750 from the H&S was met in late March.
  • The recent decline retested the neckline of the weekly H&S pattern.

On the daily graph, the retest of the weekly H&S pattern has taken the form of a 5-week inverted H&S configuration. The neckline of this pattern is upslanted on the high/low chart (thick line) and slightly down-sloping on the closing price graph (thin line). I prefer to use the high/low chart. A decisive close above the neckline will complete the pattern and signal a buy signal.

 

I want to repeat – this is a presentation of a possible interpretation. In fact, if the market rolls over and closes below the right shoulder low of 2505 a sell signal would be flashed. Also, if the daily chart H&S has an upside breakout that does not follow through it would represent a failure sell signal. Charts morph – sorry, but this is the way charts work.

Markets: $NDX, $NQ_F, $QQQQ, $QQQ

 

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At last, a bottom in Natural Gas

 

H&S bottom provides opportunity for generational bottom

At long last, a bottom may be in sight. The Natural Gas market has been in a cyclic bear trend since late 2005, as seen on the monthly chart below. I believe strongly that the low at 1.902 will not be seen again in my trading lifetime.

The continuation daily chart displays a classic H&S bottom. If this interpretation is correct the June low may serve as the right shoulder low.

This market is for long-term position traders willing to be long distant futures contracts at current levels without a stop order. Should the market slip back to 2.000 it would be an opportunity to add to long positions. Natural Gas should be viewed as a multi-year trade.

From a trading standpoint I am willing to extend leverage if the H&S bottom is completed on a closing basis. Shorter-term traders should wait for a retest of the June low or a completion of the H&S before taking a position.

The alternatives to play this market include owning distant futures (such as the February 2013 contract) or Natural Gas producers. I do NOT want anything to do with UNG or especially with the ultra long ETFs. In fact, I am willing to short the ultras on strong rallies.

$NG_F, $UNG

 

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Gold rallies out of the doom zone

 

Bear trap on May 30 puts near-term outlook into doubt.

On May 30 I posted an analysis of Gold highlighting the importance of the $1500 to $1530 zone on the weekly chart.

As a trader I look for sizable patterns and tend to ignore shorter-term technical developments. However, the price action last Wednesday, Thursday and Friday was textbook and deserves to be analyzed.

The decline on May 30 penetrated the May 23 low and tested the lower boundary zone of the massive descending triangle. The reversal on the close was a strong indication of a bear trap being sprung. Thursday was a quiet day on very little volume — but the fact the market did not go straight back down was positive. The huge advance on Friday was the confirmation of the bear trap.

There will be talk among the bears that Friday’s rally simply retested the May 8 breakout of the weekly chart trendline. However, I am a believer of the “where there is smoke there is fire” adage.

I think the burdens in the near term is upon the bears. This current rally, if not turned back hard next week, should work its way to the upper boundary of the descending triangle, or around $1,840.

There is one more chart I want to show. I believe the chart of Gold priced in Swiss Franc is a “tell.” This triangular coil could experience an upside breakout by closing above CHF1830. Such a development would create a target of CHF2130, although the prolonged nature of the coil would call this target into doubt. Anyway, it is something to keep watching.

Markets: $GLD, $GC_F

 

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