Tag Archives: S&P 500

Dilemma of dynamic patterns

Good day traders,

As the market would have it with me so often, the exact opposite of my sentiment usually happens. Ever since my last post, indices around the world have rallied hard. The sharp devaluation gave long-term players an opportunity to snap up bargains on the market. As we cross over to the latter half of the year, indices are either at or above their 200-day moving averages, and having made higher highs and higher lows after the scare in January. Unsurprisingly, price action over the last few months have developed a bottoming pattern of sorts: specifically, unconfirmed, inverted head-and-shoulders patterns are showing up on many charts. It may be a case of the breakdown from large, upright head-and-shoulders patterns resulting in a consolidation instead of further downside.

With every wek and month of upside, it does dent my confidence of the longer-term decline I am expecting. Being a long-term player is analogous to a huge ship’s maneuverability compared to a small speedboat: I cannot and will not change my outlook until way past the bottom. It is tempting to switch from a bearish to a bullish outlook now but I am still not convinced with the recent rally.The dilemma I face now is because of the presence of dynamic patterns that are suggesting upside to come. I use the term dynamic pattern to mean general price patterns that have a particular shape in recent history – these patterns do not have conventional names like the head and shoulders and others; or they may but with a certain “twist.” I will illustrate what I mean in the charts below.

The first chart is of the CAC 40. The turbulence late in 2014 produced a descending, broadening wedge pattern, which also turned out to be a inverted head and shoulders. Early in 2015, the market took off and the CAC 40 blasted off to new, major highs. Now, steer your eyes to the right half of the chart, and you will see a similar phenomenon. It is not so much the small, topping head and shoulders that matter but the similarity between the two huge, descending, broadening patterns. I have veered away from trading patterns in recent years but it is magnificent to see such huge patterns unfold, and even more important to gauge their sucess rates. Ditto for the STI and Hang Seng Index- albeit making reference to an inverted head and shoulders in 2011-2012.

A1

Moving on, I have the Dax. The dynamic pattern in the Dax starts with a good, long uptrend before a downward-biased contractional period. Then, price moves down in a classical a-b-c Elliot Wave retracement pattern. In this dynamic pattern I am identifying, the Dax then goes up and congests for a little while before flying up and away. Now, look to the right half of the chart, and see if you agree with my judgment of  the same phenomenon brewing. With such beauty in the charts, how can I ignore the case for upside?

The next chart is of the S&P 500. Bear in mind that I have highlighted the presence of a general, large, rounding pattern – a stalling in the long-term, multi-year bull run. Within that large pattern is wht we now see as a clearly-defined head and shoulders with a right shoulder breakout upwards some time in March of this year. Price is currently testing the head region. Take note of the smaller head and shoulders that is also undergoing a head test now. In this case, this dynamic pattern does not indicate anything since the head test is still ongoing.

a2

In the next few charts – FTSE 100, Hang Seng, and Russell 2000, you will see what I mean by the large, rounding, topping patterns strting to give way to what seems like a reversal, inverted head and shoulders. It is certainly not the first time I see such a phenomenon but my experience tells me it is ust about fifty-fifty where the market will head to next. Sometimes it carries on higher and proves the inverted head and shoulders to be correct – rendering the earlier head and shoulders to be invalid, or the market dives lower and proves the inverted head and shoulders (usually the smaller of the two) to be a false reversal indication. Tough call is it not? Such is the market!

a4 a5 a6

All in all, I am still wary of the multi-year bull run that has lost some steam in the last 2 years because the looming, gravely topping pattern is still intact; however, there could be short-term plays to the upside.

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

 

 

End of Europe’s uptrend while America advances?

Good evening one and all,

While browsing through charts of my workstation, I noticed quite a difference between major European indices and American ones. The general picture of the European indices seems to be that of a high made in the middle of the year, then a collapse, followed by a quick recovery, then another fall, and a small recovery to where the markets stand now. American indices were tested when selling pressure came in a few weeks ago, but buyers came out fast and the indices made V-shaped recoveries. These V-shaped recoveries are quite reliable to be traded on: the buying pressure simply blasts the market back to where it was before the decline. What this all means to me – even as my previous sentences summarized the markets on both sides of the Atlantic. – is that US indices are still considered to be in their tremendously strong uptrends but European indices are looking quite “questionable” now – at least with regards to a long-term uptrend.

I will briefly say how I think the charts may be saying something about the general economic picture: If you consider the strength and shape of the uptrend of the US indices – and basic theory about how markets relate to one another internationally – it is quite obvious that US indices have been pulling the global indices along over the years – generally-speaking, of course; however, with my recent assessment of the charts of European indices, it seems to me like Europe may be facing harder headwinds soon. There are countless factors that can come into play – and I obviously do not want to go into them; not on this site at least –  and only when events come to pass can we look back and see everything play out on the charts. But it is something I will take note. American indices are definitely back on track, and there is no indication to me of any reason why American stocks will not continue higher.

In the first three charts below, I have the Dax, CAC 40, and the Footsie. The general picture is the same: a huge consolidation after a long and strong uptrend. The worrying thing is that the recent retracements cut deep, and the markets were not able to recover back to prior levels. This is very different from American indices that have shown healthy recoveries into the prevailing uptrend. I am not suggesting a crash in European indices – barring a global decline – but when I see such trends stall, it simply means more sideways trading in the months to come. Contrast with advancing US indices, Europe certainly should not be overweight in a portfolio.

Dax   Cac  ft

sp5

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

STI erases gains. US indices making it too easy?

Evening all,

It seems like the long-awaited correction in equities has already begun. The last 2 weeks of trading was characterised by more selling pressure than buying pressure. For the local bourse (and Asia in general), the selling was quite intense. Whatever gains the STI made from the start of the year were totally erased in about two weeks of trading. The STI broke key support at 3300, and Friday’s close of 3184 is where the important 200-day MA is at.

First off, I want to reiterate my bullish stance. In my last post on general market sentiment – https://technicalanalysistalk.wordpress.com/2013/03/31/like-it-or-not-the-bulls-in-the-house/ – I said that I was leaning slightly on the bullish side since the short-term rally then was too strong. Now, I see this correction (and probably many other investors too) as a good time to get in. Of course, the present situation for the STI is that of “falling knife”. But, always monitor for the right signals to occur on the chart. Preferably, I am hoping to see a small reversal pattern of some sort. If not, it will be better to look at the constituent counters to trade.

sti

Now, on to comments for US indices. I have charts of the S&P 500 and Nasdaq.

On both charts, I highlight a very obvious continuation pattern. Basically, we have a solid trend in place, then prices decline to a MA – in this case I have a 50-day MA for mid-term trends. What should happen next is renewed buying pressure to push the market off to higher highs. In the Nasdaq, we even have a pattern to work with – a bull flag. Nasdaq’s current correction gives form to a simple small downtrend channel. Indicators are not giving out bearish divergences of any kind, so I do not see any other reason for further significant decline in the market. The set-ups on US indices look too easy to be true, but I do not think it warrants being a contrarian for the sake of it.

s&p

nas

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

Like it or not, the bull’s in the house

Evening traders/investors,

Along with mainstream media, I have been waiting for a good-sized correction in equities for quite a while already. In the same period, the market gave us small corrections but subsequent rallies left me bringing my eyebrows together. On the fundamental side, not much bad news from the States is always a good thing. The recent Cyprus scare got me ready to pull the trigger on risk-off set-ups, but it did not turn out to be much in the end. (What surprised me was the greenback inching up along with equities). Another piece of news messing with my mind is the war rhetoric and dangerous games played in that region of Northeast Asia. It is debatable whether such non-financial factors are priced into the market quickly or not, which presents a kind of wildcard for chartists. I try to be as true to certain pioneering chartists when they say that every kind of factor will be priced into the market even before confirmation of the factor. Some will say it is ridiculous for the market to know if war will emerge or when the next tsunami hits a developed country.

Feeling a little lost the past week or so, I decided to go back to the charts and rely on them as I have for so long. The media will turn from bull to bear to bull so fast you do not even know what hit you. That is why I do not trade on news and make Bloomberg my best friend on weekdays. The news messes up with your trading methodology, and even worse for those whose systems are based on the news itself. Tried and tested analysis is there to give you an edge, and money management is there to save you when you are wrong.

S&P500

In the chart of the S&P 500 above, it is ever so clear that the trend for whatever time frame you look at is up. The significance of the last 7 to 10 trading days is that US indices have breached major highs (all-time highs in some), and look set to stay above those levels. Indicators giving bearish divergences have run their course already, so I deem them as done and passed – this happens when a market reverses (makes a correction or consolidation), and the indicator drops clearly to “neutral” levels. So even though the market does not nosedive, it has made a small correction, and the previously bearish divergence has run its course, and the chartist should drop it from the chart.

I do not have any patterns to work with for now, so I do not have specific set-ups for indices. But, I am pressured to jump into equities if the bull is in the house. In a bull market, prices just keep rising. It does so in a silent way, without much fanfare from the media – unlike quick, sudden declines. As a trend-follower, I cannot keep waiting for the sake of being a contrarian.

The paradox here is this: if you think hard about it, every single day or week that the market advances brings it closer and closer to the period of consolidation or correction. So, even if you know the longer-term trend is up, it will be foolish to jump in so quickly because you know a better opportunity will come. However, we have no crystal-ball, and there is always the fear of a runaway train. Need an example? Look at USDJPY. Or, there are always “normal” mid-term equity rallies to refer to. (The 3-month run-up at the start of 2012 is an example. Look at the chart above).

I do not think this post left you any biasness on which side to favour for the days ahead! But, what I am trying to say is that while I am still waiting for a correction – I do not think it is irrational of me because my money management system tells me to avoid the market – I have no choice but to respect the trend in indices, and look at other instruments to trade.

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

Dollar and equities

Evening all,

I must apologise to regular readers starved of technical analysis here for the draught of posts in the last few weeks. I have been suddenly more active in a time-consuming hobby – golf – so time for the markets and charts have been shortened. Anyways, I should be back to churning out at least 2 posts every week soon.

Ever since the drop in equities because of the US Debt downgrade last year, the market – as it should be doing so in a multi-year bull-run – defied bears by going on a good-sized 25%+ rally. At the same time, the US Dollar has been strengthening as well. On the fundamental side, with all the dire predictions aimed at the Fed for setting off the printing machines, the US Dollar has still strengthened. There are reasons out there, but I shall not discuss here.

As of now, while equities are still trudging higher, the Dollar has lost some strength in the last few months. Chart-wise, the Dollar has already started to look bearish. The death cross a few weeks ago plus the breaking of a mid-term uptrend channel are obvious bearish takeaways. Equities may turn down in the weeks ahead. With growth forecasts cut around the world, mundane-to-disappointing earnings from corporations, and a subdued-to-gloomy outlook for major economies (including China), the case for falling equities has been making some headlines in financial media. Chart-wise, I still have to keep my head up as mid-term and long-term trends are still strong. Bearing in mind that the Dollar and equities share a negative correlation in general, is it time the Dollar depreciates against other currencies and equities fly off to even greater heights? When comparing two instruments that supposedly share some kind of correlation, the basic theory is that when there is  a contrary movement, what should happen after a while is that the two instruments will go back to the correlation that they are supposed to share. In this case, I will watch and see if the greenback continues to fall while equities hold up strong.

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

 

What bull trap?

Evening traders/investors,

I have 2 charts to show you all today. The recent strong, upward move in equities took me by surprise. So, I decided to step back and re-look at the picture painted on charts.

I will start with the STI. First off, take note of the massive head and shoulders pattern I have been having on the STI’s chart. Over the last few months, I leaned on the bearish side since the head and shoulders is traditionally a bearish pattern. Try as I might, the STI recovered from lows at 2700 and blasted past 3000. My stubborn nature is telling me there is still a chance the STI will fall back below 3000, and the upward breakout will then be rendered false. Strictly, I have no choice but to see the recent surge as the STI climbing above critical resistance at the 3000 region. This means that I have to expect further upside. 3100 becomes the nearest upside target, and I think 3150 should not be a problem even.

This is where the confusion comes in. If you refer to my last post on the STI, I uploaded a chart of several indicators. Indicators tell me of “dangerous divergences” between price and indicators; and these indications are the most accurate signals from indicators.

Most sensibly, I have to interpret this as near-term profit-taking before more buying pressure. The key event in the chart below is that STI’s closes for the last trading week have been clearly above 3000.

Next up, I have the S&P 500.

S&P 500 was rangebound at the 1300 region before the onset of the massive sell-off in August last year. Just when fears of a bear market down to 2008/2009 lows were strong, the market, as usual, flew skyward – even past the post-crash highs to hit 1400. Reading the previous sentence, what this gives us is 3 regions of price; and by now we should identify this as an inverted head and shoulders. This time around, I favour the upside since the US stock market is basically on a multi-year bull run. For double-dip preachers, a chart spanning more than 3 years with price going up in, practically, one diagonal line, equates to a multi-year bull run. Just considering this alone, I have no choice but to strongly consider my mid-term bearish view on equities. The sell-off in May was scary; especially so for short-term traders. But, the equally quick rebound cannot be ignored. The bullish sentiment is making a bull out of my 2-month old bear! Last but not least, bulls can rejoice over the upswing in the 200-day MA.

Looking back at my last few posts on longer-term takes, I realise my analysis is sometimes clouded too heavily by sentiment. The good thing is that I am staying nimble, and looking to profit whichever way the market decides to go. The problem with “staying nimble” is that I will be susceptible to wild, volatile, irrational swings and whipsaws (and we know markets are like that). This is the conundrum I have been facing over the last few months when looking at charts. Just when I have formed an opinion on the markets based on technical analysis, out pops up an exact opposite chart event that confuses my case – something like the meaning of paradox.

Maybe, just maybe, I need to refine my chart-reading skills. In every skill-based field, there will be times when the practitioner has overcome a hump in the learning curve and has reached a plateau. For a while, the practitioner tastes success from applying whatever skills acquired recently. But, in due time, the practitoner will feel lost; and this is also probably the time for an upgrade.

Till then, I can only put this post up and look back to see how future events will change the picture of the charts I posted above.

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

For real? Or a bull trap?

Good day investors/traders,

The past two weeks have been hard on me. All my set-ups were bullish Dollar and bearish equities. I got stopped out a couple of times, and started to wonder if I should jump on the other wagon. On Friday, I was holding on to a short EURUSD position. For those who trade forex, you should know what happened. Some kind of good news about Spain’s banks being able to tap on more emergency funds propelled the EUR/USD pair to close 200 pips higher for the day. Thank goodness for stop-loss orders.

Overnight, US indices also found massive buying pressure – Nasdaq ended up 3%. Right now, it seems like Europe has gotten some things under control, and things will be much better from here on; or at least, that is what financial market participants seem to think. On the other hand, here is an article from Jim Rogers: http://finance.yahoo.com/news/financial-armageddon-happen-despite-eu-061542925.html;_ylt=Al9ON_bd6HOgyD_T4SMCPZKiuYdG;_ylu=X3oDMTQ4NHBsbjRwBG1pdANDTkJDIFRvcCBTdG9yaWVzBHBrZwM4MTk2ZTVmZC1iZDcxLTM4ZmQtYjdkNC05NGQ1ZGNjZjk0OWQEcG9zAzMEc2VjA01lZGlhQkxpc3RNaXhlZExQQ0FUZW1wBHZlcgMyYTY0ZGM5MC1jMWI1LTExZTEtYjdiYi1jMWQ5NjQyZmYyMzc-;_ylg=X3oDMTFpNzk0NjhtBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25z;_ylv=3

I am not going to delve into my take on the fundamentals, so I will just give my technical opinion. I will use the S&P 500 and the STI for analysis.

First up, take note of the long-term uptrend in equities coming out of the 2008 crisis. In the chart below, I added in two blue boxes signifying the sell-in-May-and-stay-away adage. Presently, this phenomenon occured yet again, and it has succeeded – the S&P 500 lost about 9% in value in May. So, if you look at a long-term chcart like the one I uploaded below, a simplistic view will be to look for upside from now on.

Fundamentally, we know news drove markets the way they did over the last two weeks. Technically, was the chart hinting of upside to come? Yes, charts everywhere had head and shoulders patterns (inverted also). From equity charts to the chart of the VIX. Did I call for upside? I must admit I did not, though I was expecting it as a surprise. Did I trade it that way? No, and obviously lost some money. In the charts below, you will see just what happens when a head and shoulders pattern (both upright and inverted) appears after a strong move. The first one is a little ugly (which is exactly why I did not buy the bullish story), but the second one – the Singapore market CFD – is very nice looking.

 

Based on technical chart pattern projections alone, the case for upside – in the STI CFD at least – is closed. The target has been hit already. But, a small pattern can always do better than the target projected. So, my trading set-ups in the weeks ahead will be less defined, with no clear bias to either side. I tell myself that I should ride on the uptrend while it is hot; however, I still see markets as rangebound, and my long-term view is a bearish one. A little conflicting?

In summary, I see markets possibly extending gains. But, I stay firm in longer-term weakness for equities. I will continue to watch US markets rebound from the lower band of the long-term uptrend, and the STI trading inside the right shoulder of its massive unconfirmed head and shoulders.

Is the positive sentiment for real? The seasonal downswing in equities may have ended for all we know; and equities may just start climbing up from here on. Or will Jim Rogers be right? In his words: “How many times has this happened in the last three years – they (EU leaders) have had a meeting, the markets have rallied, two days later the market says wait a minute this doesn’t solve the problem.”

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

Big patterns

Good day all,

In my last few posts on the STI, I highlighted a head and shoulders pattern. I signalled a false upward breakout while the STI dropped forecefully below the 2900 region. Taking the big picture into account (in chart below), I now see the STI as still trading in the right shoulder. The left shoulder took about a whole year to form, and the head also took a year to form – September ’10 – August ’11. The 3 components to the head and shoulders pattern do not need to take an equal amount of time to form but the closer the time periods are, the better. It is interesting to note that the STI found support right at the 200-week MA – which comes in at about 2700. Support from the right shoulder is pegged at above 2600.

Back to the larger picture – the head and shoulders pattern on the chart of the STI. Head and shoulders is thought to bring massive downside. However, from what I have learnt through experienced chartists and my own experience, head and shoulders patterns can mean upside too; the key is to look for the breakout direction. So for now, even though I am looking to short rallies for short-term trading, I must bear in mind the large pattern on the chart of the STI. If the time period to form the left shoulder and head of the pattern are of indication to the time needed for the right shoulder, then we should expect a signal in less than 2 months’ time. In August last year, the US debt downgrade triggered massive sell-offs in equities. From that time, the STI started trading between 2600 and 3000 to form what we are seeing now as a right shoulder. If the right shoulder takes exactly a year to form as well – bearing in mind we are in the month of June now – then we should expect completion of the pattern in about 2 months’ time!

Next up, the Shanghai Stock Exchange (SSE).

Take a look at my last post on the Shanghai Stock Exchange: https://technicalanalysistalk.wordpress.com/2011/09/10/sse-broken-down-from-triangle/

A humongous symmetrical triangle can be seen on the SSE. And, we are post-breakout. The Shanghai index has already dropped almost 25% before recent buying pressure. I am not that confident if the projection based on the triangle will be hit since the height of the triangle projected downwards gives us a target of about 1000 for the SSE! It is not very often that you get very well-defined, humongous patterns to study. But I will obviously look for more downside as a chartist.

Next, the S&P 500. American indices are probably the reason why it is not going to be the end of the world for equities. The recent downward move in equities (last month or so) actually looks like a healthy correction for stocks in the multi-year bull run starting in 2009. Will we find support soon and start another long rally northwards? Or will this upward parallel channel come to an end?

Finally, we have the Nikkei 225.

The Nikkei has been trading inside a well-defined, downward parallel channel. The recent consolidation at about 8300-8600 does present to us possible long trading set-ups, and when price is near or at the bottom of a channel, the most simple expectation is to look for a swing up to the top of the channel. I will not elaborate on short-term set-ups, but it will be wise to keep this downward parallel channel in your chart stations.

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

Surprise in store?

Good day all,

The last trading week gave us quite a few good pieces of news. Strictly, I am still a brear on equities; but, I see the current market as a ranging one after I got stopped out on a few shorts. I tell myself that as a chartist, I should not be swayed too easily by news. It is alright to read up and be in the know but be cautious not to let news articles cloud one’s judegment. With that, I am still a bear – there is no clear indication on the chart yet that tells me to buy dips instead of  selling rallies. I support my bearish view in the charts below.

 

Basically, I see downward parallel channels depicting the general downtrend indices have been in for quite some time now. European indices are mostly below the 200-day MA. Technically, I do not see any reason to be bullish on indices though it may seem the recent consolidation is hinting at a rebound. So, what surprise exactly am I thinking may happen?

Several indices are forming unconfirmed inverted head and shoulders patterns. Take a look at the video below. The presenter, Oscar Carboni, shows us the formation of an inverted head and shoulders pattern in quite a few indices.

Link: http://www.youtube.com/watch?v=-itHSTMMkkE&list=UUez8uA1o_fDYsrSf4auWSjg&index=1&feature=plcp

In conclusion, if these inverted head and shoulders do confirm with an upward breakout, it signals the start of a climb upwards. A downward breakout means the general downtrend shall continue – as I have been pitching for a few weeks already. Let’s see how this goes.

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

General theme for 2012

Good day all,

Today, I shall post my view on the equity market for the year ahead. I was quite bullish last year, but sadly the STI decided otherwise and ended up down 17%. Nevermind that. My long-term analyses are just to give me a broad overview/forecast of what I see on charts presently, and what I am expecting to see. I do not trade or invest based on my long-term views as I prefer short-term trades where I can be more flexible in cutting losses or taking quick profits and such. I believe it is imperative for short-term traders to also zoom out of daily/intraday charts and take a good bird’s eye view of the market once in a while. So, what better time to do that than in the first several days of the beginning of the year?

In the chart below, you will see a weekly chart of the STI ranging from the middle of 2006 to where we are now. In general, 2009 was a fantastic year; 2010 was a testing one, though bulls who rode out the volatility won; and 2011 was a dissapointing one for those hoping for a continued rally (like me). Anyways, what is past remains history, which is what we see and use on the charts. Lately, I have been worried with a sign I am seeing on the charts at the moment. Before I get to that though, let us look at some fibonacci levels. I will take the high in 2007 and the low in 2009 as the 0% and 100% levels. In 2010, a support zone of 2650-2700 came out. After a strong rally in the second half of 2010, we never needed to look at 2650-2700 again. Fast forward to 2012, 2650 is the vital 50% retracement level based on the post-crash high of about 3300. So straightaway, we have two events on the chart telling us that where we are now – friday’s close of 2715 – is a very important support zone. Bring in the 200-week moving average – hovering at about 2700 presently – and we should establish this zone as very important.

Now, the reason why I am worried looking at the chart of the STI is that a large head and shoulders seems to be in the making. Where is the neckline of the potential head and shoulders? Approximately 2700.

I do not like purely speculating on patterns that are not fully formed – which means they should be confirmed with a breakout – but I will sound out the alarm and monitor a chart if I see something interesting; and here, we have a large head and shoulders. Based on basic technical theory, an upright head and shoulders should mean impending downside. But, my belief is that most, if not all, patterns can lead to both upside or downside. The trigger is to wait for the breakout. (Yes, there are failed breakouts here and there, but that is another story, and for me, I do not see it happening a significant number of times). However, most head and shoulders that are large in size – the potential one on the STI is at least 2 years old – usually signal downside. Basically, what we are actually seeing is price making a rounded top, and because of its massive size, it means a market has turned and something in the real world will trigger the collapse. Case in point: Look at the STI’s movement in 2007 and 2008. The market rallied hard coming from the multi-year bull run after the dot-com fiasco, made a top at 3800s, then dropped back down to 3000 for consolidation. What the big picture looks like is a rounded top. And such an event on the chart usually has the same psychology as an upright head and shoulders. So, once breakout is seen, we look for serious downside. Using hindsight, we can see this phenomenon unfolding from 2007 to 2009.

It does not just happen in the STI’s chart in 2008, take a look at the charts below. First, we have the S&P 500. Back in 2000-2001, the market rounded, fell below the 200-week MA and there was no turning back after that. The multi-year bull run ensued after a bottom emerged by June of 2003. Once again, the S&P 500 made another rounding top in 2007, and we all know what happened after that.

  

So, this is one tool I have learnt to use in finding mid- to long-term market reversals. So, now it seems like I am bearish on the STI for this year right? Well, the “catalyst” is the breakout. Will we see the STI break through the neckline convincingly and staying down? If we get that, then I have to say I will be on the side of those naysayers who keep harping on how we are starting to see the crack from a double-dip recession. I am hoping against all hope that that is not what we get. But if the charts tell me so, then I have no choice as a chartist but to look for some serious downside.