I was going to do my own charting pic for this one, but realized there were quite a few out there on the net. Is everyone waiting for this? what if there's a whipsaw and it all comes swooping back up? Or will it become a self fulfilling prophecy where no buyers would dare come in until 830?
The head and shoulders pattern is generally regarded as a reversal pattern and it is most often seen in uptrends.
Eventually, the market begins to slow down and the forces of supply and demand are generally considered in balance. Sellers come in at the highs (left shoulder) and the downside is probed (beginning neckline.) Buyers soon return to the market and ultimately push through to new highs (head.) However, the new highs are quickly turned back and the downside is tested again (continuing neckline.) Tentative buying re-emerges and the market rallies once more, but fails to take out the previous high. (This last top is considered the right shoulder.) Buying dries up and the market tests the downside yet again.
When the index or stock breaks below the neckline it is then that the pattern is considered valid. And that is the case we presently have now on the S&P 500 cash index (SPX).
It is common for a head and shoulders pattern to be tested, that is the price moves up to the neckline once again and if the neckline holds as resistance then the neckline is considered valid and the market or stock will often head down to the eventual price target derived from this head and shoulders pattern.
With respect to the head and shoulders pattern currently in play on the S&P 500 the neck line rests in the region of 892, says rebeltraders.
Art Cashin, director of floor operations for UBS Financial Sevices, said that "That's why I think we're going to look more closely at the outlook than at the [current] earnings." Cashin declared his latest danger point for the S&P 500: "If we get down through 877 on the S&P, people will be talking about a 'head-and-shoulders' — and that will not be too happy," he warned. Breakdown of the neckline may mean varying targets from 810 to 830 for the S&P, and 7500 to 7600 for the Dow. Why are there varying targets? Because as much as technical analysis offers you patterns to choose from, it is up to the analyst to plot the lines. For example, take a look at this guy's neckline below:
Since nobody is right in a subjective interpretation, I would just have to personally respectfully agree that the trendline or neckline plotted here did not intersect properly with the right shoulder. It should have been drawn higher (see first chart).
Cassandratrade trade goes on to project what would happen after this small head and shoulders pattern (bearish-short term -where we are now), which is actually part of a larger inverse head and shoulders pattern (bullish).
As seen in his/her pattern, the analysis makes sense but the June target for reaching the 800 lows for the S&P are a bit delayed. The reason cited was that the market was a lot stronger than we expected and held on in a surprising manner. Traders with a bearish bias here should keep in mind the market has already shown impressive strength. We believe this resiliency is a distortion caused by the massive liquidity injection made by the Fed.
Add to this the cost of cheap money in interest rates worldwide. From personal experience during the collapse of 2007 2008, clients would rather wait out 5 or 10 years rather than take the cut loss of 30 to 50% (or more) of their portfolio, stating that the other alternative if they cut their money was to place their money back to fixed income instruments that offered too low yields. Doing their own math, they would rather wait out the cycle and would still get their money back. This would also be the same prevailing notion in this current drop, even as interest rates still keep falling.
All in all, they way this HNS pattern is on every stock talk blogsite, I wouldn't be surprised it there was a large intraday fall to 810 to 830 level simultaneously with a large intraday hammer reversal back up.
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