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Thursday, April 12, 2012

Possible "head and shoulders" pattern could signal further stock declines

The S&P 500 appears to be forming a classic head and shoulders pattern, which simply means that if you look at the chart, the shape that the chart is forming resembles a left shoulder, higher head, and then a right shoulder:

If the chart tops before reaching the recent highs and turns negative again, we will have a right shoulder.  Typically, and head and shoulders pattern signals further declines for stocks, which is exactly what I expect to see.  However, should stocks continue to advance, pushing past the recent highs, the head and shoulders pattern will not form, and we could see even higher levels for stocks.  This is certainly a possibility, but I believe the probability is with lower stock prices in the near-term.  We shall see!

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