A Tale of Two Competing Head and Shoulders

Feb 18, 2009: 10:37 AM CST

A very interesting development is taking shape on the daily US Equity Index Charts – there appears to be two distinct – and opposing – Head and Shoulders formations taking shape… and we’re at the break-out point of both patterns. Let’s see these and what they might imply.

S&P 500 Daily:

I’ve never seen two such patterns form in the same price structure on the same timeframe – this is unique!

First, let’s start with the Inverse Head and Shoulders, which I’ve colored Green because it has bullish (upside) potential. The formation is a slanted pattern, with current neckline around 825 to 850. A break above that level would confirm the pattern… though we’re actually having a break (currently) in the opposite direction which is disconfirming the pattern.

The Left Shoulder (LS) formed in October with the Head (H) forming at the November Lows. The final Right Shoulder (RS) formed with the January lows and I saw this pattern discussed across different blogs so I know a lot of people were looking at it… but currently the pattern is failing (for the moment). If the pattern were to complete (reach its objective), the upside target (with a break above 825) would be about 150 points higher than the neckline, which would take us to around 1,000. That’s the distance from the head to the neckline which is then added to the downward sloping neckline (not drawn).

However, a second Head and Shoulders pattern – a smaller pattern – has formed from the December Highs (LS), January highs (H), and February highs (RS). This pattern’s neckline is also downward sloping and is currently around 775. We seem to be testing that trendline (neckline) at the moment. If this pattern is the dominant one, then we would expect a 125 (estimate) down-move off the neckline (at 775) which would take us down to 650.

Keep in mind these figures are very rough estimates – you’ll need to do deeper work to set your own possible (and more exact) targets.

The market is so tightly wound right now and there’s opposing methods of analysis that say we’re headed higher while others say we’re headed lower. I think the strange simultaneous formation of two opposing Head and Shoulders patterns underscores this point. For the time being, it seems the bias is still to the downside, but with the market so on edge, it’s probably best not to let a bias or viewpoint cloud your objective thinking.

Corey Rosenbloom
Afraid to Trade.com

Comments

KY

Well I think in TA, in an inverted H&S pattern, the right shoulder cannot break the left shoulder low. Once broken, the inverted H&S fail.

Hence, I think you are off this one.

Anonymous

volume does NOT confirm either pattern though its closer on the bullish case.

Corey Rosenbloom

Vasu,

To an extent, yes, but I probably wouldn't classify it as an official bear flag. I've never heard that discussed so it's interesting to see it - thank you for bringing it up.

It'd probably more classify it as an "AB = CD" relationship with the 2003 - 2007 move being the near 45 degree connector and we've already exceeded the CD target now, though much sharper than the AB down swing.

Very fascinating pattern. Almost like a mirror image, but the decline was worse (faster) in 2008 than in 2001-2002.

Corey Rosenbloom

NotAfraid,

A trader and I had that same discussion last night and that was the point I raised - you can't reverse something without a prior trend, meaning you can't have an official reversal to the downside if the trend is already down.

Or stated differently, the Inverse Head and Shoulders would be more likely as a singular pattern because of the prior downtrend and current consolidation.

But I'm showing it more as an interesting "Hmm, look at that" sort of way instead of saying "here's what the market is about to do."

I also wanted to open it up for discussion so I'm glad to hear everyone's thoughts... even if it is "Yah, Corey, you're really off base with this one" :)

Vasu

yes cory 5 yr weekly chart S & P 500 bearish flag break out ?

NotAfraidofTrend

Sorry, I got the red and green reversed in my comment above.

Corey, I thought that the red H&S would be meaningful only if it were at a market top.

As the green H&S is at what could potentially be a market bottom, the green H&S pattern, still evolving, is more relevant. However, the neck line is not yet broken and it would be preferable if the neckline were sloping upwards.

So, either way, it is not a very definitive.

NotAfraidofTrend

Corey, I thought that the green H&S would be meaningful only if it were at a market top.

As the red H&S is at what could potentially be a market bottom, the red H&S pattern, still evolving, is more relevant. However, the neck line is not yet broken and it would be preferable if the neckline were sloping upwards.

So, either way, it is not a very definitive.

Corey Rosenbloom

Vasu,

No, I haven't seen that one. Do you mean on the monthly or perhaps weekly time frame?

Corey Rosenbloom

Anon,

Perhaps, but I'm merely making an observation for readers to think about themselves. I'm not trying to make any prediction on this post.

File it under "Hmm. That's interesting."