September 15th, 2010

Job Well Done, Right Shoulder Finished

We made it. Against the odds and the cries of “Eternal Optimist” (perhaps I’ll start calling them the “Eternal Pessimists”), we climbed the right side of this valley and made it up to the neckline. I must say that it looks pretty good from up here.

Those who think we’re stuck in a trading range will probably use this opportunity to quickly sell shares at what they truly believe are obscenely and unwarranted high prices. Those who think we’re finally going to break above this resistance level are combing their charts looking for stocks to buy. They’re biting their nails waiting for the green light to jump on board for a ride to the next objective … the convergence of those two trendlines at around 1150-1164, a mere 3% away (refer to the posts mentioned below for charts with descriptions of those lines).

Frequent readers here know that I was one of the first to identify this pattern as it was emerging back in the middle of August in “Top or Consolidation, That Is the Question” and followed up the next week, on August 18, with “Head and Shoulder Reversal Chart Pattern?” in which I wrote:

“Slowly, ever so slowly, the market is attempting to put in the right shoulder of a small but important head-and-shoulder reversal pattern. The pattern isn’t large enough to generate any sort of substantial upside move if and when completed. But every momentum move has to begin somewhere. An even more significant accomplishment would be if the market were able to cross above the upper boundary of that Consolidation Channel because that descending resistance trendline stretches all the way back to the market peak in 2007.”

Well here we are, four weeks later and, sure enough, that right shoulder is now complete.

The move from the bottom of the right shoulder to the neckline was 7.4% so many are now saying the market is over-extended and it needs to take a rest, to consolidate. (As an aside, anybody remember the days when the market made a 7.5-10.0% move in a year and it was considered a good year?) Uncharacteristically, I gambled my intuition and increased my exposure to stocks around the bottom of the shoulder and saw my portfolio jump by around 4%. I am still approximately 35% in cash waiting for that neckline break confirmation so my gains were trimmed. However, I attribute the nice gain to excellent stock picking concentrated mostly in tech stocks. But like the rest of you, I’m asking “So what happens now? where to from here?” My guess is that it will take about a week or two for renewed momentum to build up again.

Today’s action into the close was again highly suspicious with some strange volume at the very end:

It’s as if orders went out from somewhere to someone to “hold the line, push prices lower, frighten the bears so they’ll shake the tree, so more ripe shares will fall to ground so we can come in and scoop them up to harvest for the next move higher”.

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  • Anonymous

    I have a buy (not too strong however) at 1120 (SPX) with an objective of 1290. I see a stronger buy signal at 1130 however. The charts will prevail from here to exceed the above price objective and we'll have once again have the glass half FULL!!!

  • Douglas

    I agree with your previous post, Joe, that the all in signal will be given "when market crosses those hurdles with conviction increased trading activity/volume." My question is, "Where's the volume?" Do you realize that the 45 point move higher over the past 9 days (the ones that finished your right shoulder) are the nine LOWEST trading volume days over the past 6 months!?!? I will gladly miss the 3 – 4% initial pop for an actual valid breakthrough. Until then, this market appears more set on a holding pattern.

  • Joe

    Volume, or lack of it, is a mystery. I'm going to have to do some research to find if there's any precedent or analogous situations.

  • Anonymous

    Are the new highs confirming your outlook? You nailed the new high trend in March of 2009

  • Joe

    I'm hoping we start seeing the volume and the move to the upside next week. I've been adding to my long positions in anticipation.

  • Anonymous

    From earlier post- glassssss is more than halffff full. SPX just hit 1130 this AM. Look for 1320 instead of 1290 with further upgrades with even better signals.

  • Anonymous

    Volume does NOT matter. All you need is slightly better demand than supply. With this scenario the market keeps inching up. However if a catalyst develops like a massive Repub victory, the acceleration in volume will begin. Until then get in and don't miss the move higer before the catalyst makes this chemical reaction possible.

  • Anonymous

    Where's my friend JC?