Thursday, September 29, 2016

Inverted Head and Shoulders pattern abound

Even though the market declined in the beginning of this week and scared away many market participants, who had just recently entered the markets, market is now again near all-time highs. But this time, markets are sporting inverted head and shoulders patterns.

Inverted Head and Shoulder patterns are bullish patterns. They either suggest trend reversal or trend continuation after consolidation. Once this pattern is complete, we can assume that the sideways action of the past 2 months has been completed and we are not on the verge of a substantial rally.

Following chart shows the inverted head and shoulders pattern in SP500:

A rally above 2200 level and holding that price will suggest that the market has broken out. Target of this pattern is at least 2275. However, this pattern could result in significantly higher prices because we will enter a very bullish part of the market rally i.e. 3rd wave ascent.

We have been discussing this potential Head and Shoulders pattern for the past few weeks. Following chart was shared on September 20th, highlighting Nasdaq 100 performance and potential Head and Shoulder formation:

Since then the Nasdaq 100 index broke above the neck line and has now completed a successful test of the neck line. Following chart shows the performance of Nasdaq with recent market data filled in:

Overall market trend remain up, as per Market Classification Model. We use MCM to identify the trend and it has kept us on the right side of the market for a very long time now.

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