February 18th, 2010
The market can be in only one of three conditions at any one time: trending, consolidating or reversing. With four out of six up-days and it sounds as if the pundits believe all the world’s cares have been resolved and the market has resumed its march to new heights. So which is it? An up-trend, a consolidation or a reversal?
In truth, asking which condition the market is truly in today is actually a trick question because there are several answers depending on one’s trading time horizon. For example, we’re soon going to begin hearing talk of an inverted head-and-shoulder pattern in the process of being formed (click on image to enlarge):
It could happen but I wouldn’t consider it a new trend. I wouldn’t place a large bet that the seed has been planted for a repeat of the 70% move between March 9, 2009 and the January 19 peak. If this is a reversal pattern then it’s scale only justifies a retracement no higher than around 1150 (the distance above equaling distance below neckline).
If you’re a longer-term trader counting on bigger moves then you understand that significant reversals don’t happen is such short a time frame. This “inverted head+shoulder” could actually be part of a larger pattern (click on image to enlarge):
If the market does form the inverted head+shoulders described above and crosses above the neckline, it likely could stall out as it approaches the downward sloping 50-day moving average, an ominous sign leading to the completion of a right shoulder of a larger pattern. That right shoulder could eventually be followed by a cross under the longer pattern’s neckline. The target for the decline that follows would be around 950, measured according to the same rule described earlier (neckline as the midpoint).
Can an even longer-term view indicate the sort of pattern the market is forming (click on image to enlarge)?
The slope of the long-term trend has definitely flattened, adding weight to the notion that, at a minimum, the market is forming a consolidation pattern, an extended form of the buyers’ remorse variety, one that carry’s the Index back to test the blue neckline of the inverted head-and-shoulder reversal pattern.
There’s a little of something for everyone, depending on your preferred trading time horizon. There are both reversal and consolidation patterns, however I’m afraid we’ll have to patiently wait for a new trend to begin. I prefer the long-term view, anticipate the correction to continue and look forward to another outstanding buying opportunity later this year.