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Monday, April 23, 2012

Head and Shoulders Pattern Now More Defined

The S&P 500 has been developing a head and shoulders pattern, which I mentioned in a post last week. After the past several trading sessions, the pattern has now become more defined:

You can now clearly see the left should (from about February 20th through March 5th), the head (from about march 12th through April 9th), and the right shoulder, which started to develop around April 9th, and is still developing.  Keep an eye on the 1,358 level, which we could easily crack as early as tomorrow, but I suspect will be violated within a week (the low today was 1,358.79).  Head and shoulders patterns can be very powerful - what this pattern usually means is that, once the right shoulder forms, a technical break-down (in this case through 1,358), should mean a significant decline for stocks.

Let's not forget about the NASDAQ!  Remember that last week I also mentioned that it was forming a head and shoulders pattern, and on Friday that the index closed a hair above 3,000.  We cracked 3,000 today with a 30 point drop, and the head and shoulders pattern for this index is also forming nicely, although it is not quite as well-defined as that of the S&P 500:

In this chart (above) one can see the left shoulder from also about February 20th through about March 5th - same as the S&P 500, the head formed from about March 5th through April 9th (again the same as the S&P 500), and the right shoulder from about April 9th through this past Friday.  The key difference here is that after today's trading, the NASDAQ Composite has already broken down!  You can see the gap down from today's action, and the steep decline.  The 2,900 level is the next support for this index, but I strongly suspect we will fall right through that level.

Keep in mind also that markets do not typically go straight up or straight down.  With some good earnings reports we could easily see stocks bounce more than a few times along the way to lower levels.  However, a correction is clearly underway; the only question is: How low will we go?

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