Head & Shoulders Go Mainstream

Technical Analysis

Wall Street Greek Technical Analyst Steven Ferguson offers his latest critical analysis of the market. Ferguson has authored a series of research articles on econometrics and programmatic trade. In this latest piece, Ferguson again sees an ominous Head & Shoulders pattern that portends near-term trouble for traders. Steven also operates Systemata Corp., a model-based controls design firm.

Head & Shoulders Go Mainstream

While many traders may already be familiar with technical analysis as the basis for timing the entry and exit of long or short positions in the stock market, it is also clear that the use of charting patterns, Fibonacci retracements and moving averages is becoming increasingly popular among a wider audience. And even while mainstream media outlets rush to publish more articles on similar topics, Greek readers can rest assured that important emerging trends, whether based on economic data or strictly on stock charts, will never be overlooked.

To that end, it would appear that major indices are now overlooking another precipice and headed for a further downward plunge. Observe the daily chart for the S&P index, which opened up almost 20 points in early trading Monday but closed near the day's low.



(Tickers: NYSE: DIA, NYSE: SPY, Nasdaq: QQQQ, NYSE: DOG, NYSE: SDS, NYSE: QLD, Nasdaq: NDAQ, NYSE: NYX)

While the close itself is perhaps a harbinger of future downward movement, the following observations point to upcoming decline as well:

• Note first that yet another Head & Shoulders Pattern has emerged in the S&P as well as in all major indices worldwide. This one is bearish and has a technical target of 900 on the index.


• Note also that a short-lived bounce from the 1050 neckline and above the 200 day moving average (red) has halted at the 50 day moving average (blue). Recall that some institutions observe the 200 day moving average as the basis for segregating bull and bear market conditions.


• Note that the 50 day moving average has begun its decent towards the 200 day moving average. Once the 50 day average is aligned below the 200 day moving average, this signal provides strong confirmation of bear market conditions.


• Note also that daily stochastics, the black and red lines featured at the top of the chart, provide cyclical indication that prices are done topping after closing near the high for many days, and are now likely to resume the downward trend that characterized the month of May.


• Finally, note that prices have recovered 50% of the downward move which began on April 26th at 1220 and ended early June at 1040. The subsequent 90 point bounce has provided a near-perfect 50% Fibonacci Retracement.

While the 13 and 34 week moving averages (not depicted) have not yet realigned to indicate bear market conditions, the current Elliot Wave count suggests that sub-wave 3 down is about to begin. By definition, this move will last longer and move further than sub-wave 1, which constitutes the above described move from 1220 to 1040 and which lasted approximately 30 trading days. This would further imply a nominal downward target of 900, which is also consistent with the Head and Shoulders pattern illustrated in Figure 1.

It is the author's opinion that Wall Street Greek readers should exit any remaining long positions and raise cash under these uncertain market conditions.



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