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Head and Shoulders Pattern Shaping Up

Posted on April 23, 2009 by Adam

Where is the market going to go next week? If I had to guess, I would say down. Earlier this week we broke an important upward sloping trendline, which was coincident with a Point and Figure sell signal in the S&P 500. That was the first sell signal since February! The price objective of this sell signal is 780.

Now it looks like we’re forming a small head and shoulders pattern at the top of this trend. Take a look below. If we confirm this pattern, its height is 45 points. From the point of the breakout, that would make its price objective 785 - right on target with the point and figure chart.

I have already added a new bearish position in Morgan Stanley (it’s agressive I know, but I’m keeping it on a short leash). I might look to add one more if the market continues to weaken. However, I think this is a good thing for longer term price action. We need to work off some of these overbought levels. If we can do that without generating too many more bearish signals, the next rally should be ripe with opportunity.

Happy Trading!