Inverted Head & Shoulders Pattern Worked

The reverse head & shoulders formation noted yesterday worked like a charm to predict the market move today. The chart below from yesterday's STU gave clear guidance as to what to expect. Steve Hochberg has been on a roll lately, and is providing crisper setups than a scan of the blogosphere would lead you to believe. While the market has come back to the neckline and hovered there most of the day, it should spike higher to the Sp1120 area over the next few days, perhaps after one downturn before the end.  

 

Yesterday across the board of wave sites the odds were said to be 50:50 as to today's action. Like the Monty Hall Effect, the head & shoulders pattern was a tell which increased the odds to better than 50:50 on the upside. You can read the literature on the head & shoulders pattern, and even when followed precisely (they are oft recognized but seldom rigorously confirmed) they only give a probability of a move to follow, but it is a useful tool to increase the odds of a pick. Here is some precision from a recent post:

The EWT recently laid out the theory behind the head & shoulders pattern (EWI makes it available for free, in case you would like to peruse an EWT on point to today). Edwards & Magee's book says that the first shoulder should rise on heavy volume, but the second shoulder should have "decidedly less volume" than either the head or the first shoulder. ... The EWT notes as well that the whole formation should come after an "extensive trend". ... Many purported head & shoulders patterns fail these two tests. The weak volume indicates exhaustion of trend and a coming rotation to the other direction. 

Shanky, PUGridiron, WavePrinciple, and others had comments on the inverted head & shoulders this morning. At times the pattern resolves to a market move beyond the neckline the same distance the head was from the neckline, which in this case is 50 pts in the S&P, giving a target of Sp1140. Daneric is today's contrarian, finding the inverted head & shoulders "so obvious" that he thinks instead we will end short of that target. He remains within the range of a 50-62% retrace, or Sp1107-1122, with a lower target range around where we are now as most likely. 

The STU did not label the waves up from the head, but I have seen two counts floating around: an ABC - X or a 1-2. You can pop over to Carl Futia to read a bullish view, and several sites (such as Kenny) maintain an alt bullish count. Kenny notes that volume is not confirming a breakout. Before the bears take comfort, note that EvilSpeculator sees a pattern on the NYSE A/D ratio which is very bullish. This is what to watch tomorrow to see if this is a fake-out or something more. 

Given that the head is the end of an impulse down, this should break as a "3" corrective wave, not a "5". Most likely it breaks as an ABC-X-ABC, meaning we are in the second A wave and should expect some sort of pullback B wave before the final thrust up to close the gap at Sp1115. And then we end this goat rodeo and head south.

 

Comments

[watch your wallet]

Have any of you seen Prechter speak, live or recorded? Cripes, he looks like a third grader pretending he doesn't know why the cookie jar is empty. Cagey hokum peddler smart enough to know that what he's doing is pure crud and, worse, downright nasty. Reminds me very much of that John Edwards who claimed to speak with deceased people. "Each time that second hand rolls to the top, like dandelions up they pop... their ears so big, their eyes so wide, I know I feed them bonafide balogna..."

[Account Deleted]

Buy signal in daily chart of MICRON TECHNOLOGY

http://niftychartsandpatterns.blogspot.com/2010/05/micron-technologymu-buy-signal-in-daily.html

Thank you

[bob m]

DG!!! Is that you?? Missed you.

[Account Deleted]

MICROSOFT CORP Oversold levels can trigger a rally

http://niftychartsandpatterns.blogspot.com/2010/05/microsoft-corp-oversold-levels-can.html

Thank you

[DG]

bob m,

No, I'm primarily lurking these days. I don't need to be insulted when all I'm trying to do is fulfill what I always saw as the primary purpose of this blog, which is to discuss the markets using wave theory. Life is too short. I hope everyone enjoys the new blog format where posting gets you accused of being a "paper-trading college kid" by one of a dozen different usernames used by the same user. I've been posting and discussing trading online for years and I've NEVER seen anything like this before, nor do I feel the need to participate.

That said, I'm thinking of setting up an invite-only blog explaining the trading method I've been using in conjunction with Neely's recommendations. As I've mentioned, I agree 100% with Neely's characterization of certain market periods as "unpredictable", but I disagree with him on what to do about that. There are a lot of people who are serious about methodology here, so this could be a good way to present a new wave-based methodology to people who would then help expand upon it. Since this would not require me divulging any of Neely's intellectual property which isn't already in the public domain at Traders Talk, it wouldn't be limited to Neely subscribers, but it also wouldn't let in the "riff-raff", with whom I have no desire to share anything, especially not something that's been working quite nicely.

Anyway, in response to Neely's S&P update of May 12th, I proposed that the pattern under formation was not a Contracting Triangle and the May 6th drop was not wave-a of a Contracting Triangle, but wave-e of an Expanding Triangle which began in mid-April and that in fact it was likely that it was not just an Expanding Triangle, but an Expanding Diametric (which basically looks like an Expanding Triangle through the first 5 segments, but then goes on to have two additional segments). The primary requirements for that Expanding Diametric formation to be "real" were that wave-f not fully retrace wave-e in less time than it took wave-e to form and that wave-g be shorter in price than wave-e. This meant we had to bottom above 1034.22 on the SPX cash.

Both conditions have been met and confirmed by subsequent behavior, i.e. we've rallied from the wave-g low. So, unless we roll over to a new low, I will work on the assumption that count is correct. It implies a further rally from here, but no new highs. Specific areas I'll watch on the SPX and IWM are 1151.41 and 69.71, the 61.8% retrace levels from price high to price low. For the decline from the April highs to be a true reversal, those levels should not be breached in any serious way. If they do get breached, the next step in the wave count process would be to watch for them to end at a lower high below those levels. If that doesn't happen, I would then revisit the count.

Here is an image of the structure.

http://yfrog.com/bcspxdailymay7p

[Account Deleted]

YAHOO INC is showing positive divergence in daily chart

http://niftychartsandpatterns.blogspot.com/2010/05/yahoo-inc-daily-chart-near-channel.html

Thank you

[Account Deleted]

Anyone ta lking about DOW 911 or insane lower levels should be given serious medical attention.Also such people should be kept under tight security cover as their mental condition is unsafe for the wellbeing of the society and its citizens.
Bet yes one should be compassionate with them too as its their mental problem thats making them talk insanely.

[GlennLoserNeely]

"That said, I'm thinking of setting up an invite-only blog explaining the trading method I've been using in conjunction with Neely's recommendations." - DG

Why don't you do yourself a favor and stop talking about it, and just do it. Only then, will you truly be able to see just how many (or few) here really care about Neely and his all-encompassing methodology that also happens to apply to "unpredictable" periods in the market.

[DG]

Why don't you do yourself a favor and stop talking about it, and just do it.

Why don't you do the world a favor and kill yourself.

[DG]

Only then, will you truly be able to see just how many (or few) here really care

Only a blind man wouldn't have realized that my comments generate many more follow-up questions and comments than yours. Once you factor out your sockpuppets, of course.

So, OBVIOUSLY, more people here care about what I have to say than about what you have to say. By your own standard, you're the loser.

Now, if you had said, "Only I can claim to have the most fake usernames on this blog", by that standard even I would have to admit that you are the king.

[DG]

Anyone interested in discussing short-term NeoWave-based trading, send me an email at papertradingcollegekid at gmail.com. We can discuss what I've discovered, why I think it works, what I mean by "works" and when I think it might stop working and why. I'll also keep a running tab of trades so that when the sackless wonders who now infest this blog start in with their BS, there will be a track record to shut them up.

[Roger D.]

Bernanke can you say "ass pucker"

Nothing bullish about these charts.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/22cd5bd5-dc48-4f25-ad45-0299ce2f0e64

http://www.screencast.com/users/parisgnome/folders/Default/media/bcdd165e-a1ee-4d16-ac08-43f58e788c6f

Boeing
http://www.screencast.com/users/parisgnome/folders/Default/media/eea3639b-6ad7-4195-bab6-fecff46ba149

http://www.screencast.com/users/parisgnome/folders/Default/media/5c6c179c-d9ed-4cfd-9fe7-44ce424c1ce1

[Hubert]

Internet Flame wars are bullish. Whenever I have noticed arguments break out on forums the market rallies big. Its an interesting socionomic phenomena. Keep flaming guys, you are signaling a nice market rally.

[Account Deleted]

DOW JONES weekly triangle pattern

http://niftychartsandpatterns.blogspot.com/2010/05/dow-jones-ind-weekly-triangle.html

Thank you

[DG]

Internet Flame wars are bullish. Whenever I have noticed arguments break out on forums the market rallies big. Its an interesting socionomic phenomena. Keep flaming guys, you are signaling a nice market rally.

I'm pretty sure at some point during the period from October 2007 to March 2009, there was a flame war somewhere on the Internet, so I'm not sure your theory holds.

I am not flaming that person about which direction the market will go in. I think he's a piece of boring sub-human trash, regardless of which direction he thinks the market will go.

[bob m]

DG, as my 70's persona might say, "I dig ya, baby. I dig ya" . I am not a Neely subscriber so I will miss you. wish you luck.

[DG]

Hey bob,

No, you don't need to be a Neely subscriber for this one. It's purely short-term trading using my variant of NeoWave logic. Hopefully, Neely won't come after me for copyright, but just to be clear, I am in NO WAY affiliated with Neely or NeoWave in ANY CAPACITY. I'm just a dude who figured out a recurring quirk in the market and am trying to use NeoWave concepts to exploit it.

So, if you're interested in giving it a look, just send an e-mail to that address above. At the very least, I think what I've put together can help short-term wave-based traders rethink some of their assumptions about the necessity of counting short-term waves vs. the necessity of understanding the logic of short-term waves.

Also, although it's geared toward short-term trading and capturing reversals, nothing prevents the trades from becoming longer-term trades once the stops get to breakeven. From there, trade management becomes a matter of preference. So, anyone who's looking for some thoughts on how to use wave theory to trade reversals can also potentially find something of interest.