Note: The post herein was absolutely wrong on the analysis of the H&S top in stock indexes. Guess what — traders are wrong from time to time. I make bold calls and some are right and some are wrong. At the end of the day, price is king and nothing else matters. Members of the Factor research service know that I over-rode the analysis herein on January 6, cautioning that the stock market had deep internal trouble.
Classical charting principles have rules. The Head and Shoulders is a classical chart configuration. The apparent and well-advertised H&S top in the U.S. stock indexes do not meet the rules.
Perma-bears, a H&S top is not sitting for you under the Xmas tree!
Sorry to all of you stock market doomsayers, but labeling the U.S. stock index charts as H&S tops just does not work.
Volume is an important criteria upon which to judge the validity of the H&S patterns. Richard W. Schabacker (Technical Analysis and Stock Market Profits), and later, John Magee and Robert Edwards (Technical Analysis of Stock Market Trends), are considered the pioneers in classical charting principles. According to the founders of classical charting, as a rule volume should be greatest in the left shoulder or head and lightest in the right shoulder in order to validate a H&S pattern.
As the charts of the Dow Jones Composite, Dow Industrials and S&P 500 show below, the largest slug of volume has been in the right shoulder. This is NOT a sign of a valid H&S pattern, thus the interpretation of a H&S top in the U.S. stock index charts is not likely to be correct.
Given this fact, a chartist must look for alternative interpretations of the longer-term charts. There is a possible interpretation that could fit. The S&Ps have a target around 2,400 based on the Apr 2013 completion of a massive 13-year rectangle on the weekly chart. The current 19-month congestion area does not comply with the H&S top guidelines — thus, a continuation of the current trend is more likely.
Again, looking at the weekly S&P graph, an advance and close above the supposed right shoulder high at 2116 would represent a possible H&S failure. The measuring rule on a H&S failure is shown with a target of 2,386. This is almost perfectly aligned with the target indicated by the 13-year rectangle.
The stock market must always be viewed in a long-term historical context. The yearly semi-log chart of the DJIA provides this historical perspective. As seen on this chart, the DJIA has been in a sustained bull trend since 1900 with three interruptions. The first interruption took the form of a symmetrical triangle from 1929 through 1944, a period of 15 years. The second interruption took the form of a continuation H&S pattern from 1966 through 1983, a period of 17 years. Is it possible that this chart displays a the third interruption as a possible broadening top beginning in 2000, a period of 16 years? Any thing is possible, but the burden of proof is on the bears.
Markets: $DJIA, $SPX, $QQQ, $DIA, $ES_F, $YM_F