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Bullish Head and Shoulders Bottom? Or, False Break Out Warning?

When we look at the charts of the major indexes we see a clear head and shoulders pattern based on price, and it seems like everyone has written or read about it in the past several weeks and months. Typically, a head and shoulders bottom is very bullish, and based on the SP500 the price target is around 1250. Doesn't that sound great?

Wait........wait just a minute though. One of my biggest concerns about this technical pattern is the lack of volume on the break above the neckline. If you look at the Dow Jones Industrials and the SP500 there is a real lack of volume on the break above the neckline, in fact it continues to decline on the Dow Jones. There's no volume confirmation of the pattern.

The lack of volume on the break out is a clear warning this move up might be a false break out and investors/traders should take heed. While a back test (SP 500 @ 970) of the neckline is a typical price pattern expectation, a break below that neckline would be concerning. Furthermore, a move below the right should (SP500 @ 870-880) would be detrimental.

I raise these issues because the pattern is quite large, and when a pattern fails, the move in the opposite direction (pattern reversal) can be quite severe, which is the reason for the warning. If this pattern fails, a correction of size might be in the offing, and for those who seek low risk entry points on the long side, patience might just be your virtue.

My Primary View:

My primary view has always been this move up is a bear market rally, and the markets are over bought. I've been expecting a market top some time between August and October of 2009, and we might have put that top in with the recent high, but we'll have to let the price action tell us more.

That being said, we are do for a pull back, and the neckline (SP500 @ 970) is the obvious first stop and then the prior peak (SP500 @ 950) is the second obvious stop. If the 950-970 area doesn't hold the next price supports are 870-880, then 840-850, and 810.

Could it be a larger correction? Absolutely, the technical and Elliott Wave structures are still open for something large to the downside, but let's not get ahead of ourselves. The markets are due of a pull back or consolidation at a minimum, so let's see if the obvious targets hold or not.

Personally, I think we test 950-970 area, consolidate slightly higher, and then move down into the 840-870 area. That's my minimum pull back targets for now.

Hope all is well

 

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