S&P Head and Shoulders, Part 2

July 15, 2008 Follow-up


It has now been 6 months since I posted my dire forecast of the S&P reaching 1225.  Let’s see what happened:


As expected, the S&P500 moved to 1225 and below.  I wish I was wrong about this, but the chart displayed a classic H&S pattern.  The green lines on the chart are called “measure” lines, and they are used to predict the ultimate target in a technical formation.  The left line measures the distance from the neckline to the highest head point.  The second green line is a copy of the first, of the same length, and is placed at the point where the neckline is broken.  The “measured move” is this calculated to be in the 1250ish level.  I added 25 index points to my target because of the velocity with which the January sell-off occurred.


Another point to notice about this pattern is that the right shoulder should have lower volume than the left and head.  Since the right shoulder in this chart was during the Christmas break, lower volume was clear.  The reason the lower volume confirms the pattern is because fewer buyers are entering the market to drive it to new highs.  This lack of sponsorship usually means that the rally will fail sooner rather than later, and the chances of a neckline break are higher.


Lastly, we see the tremendous volume surge in January, as the neckline is broken.  This is an indication that not only have buyers dried up, but new sellers have entered the market.  This is typical for any trendline break, but especially noteworthy in the Head and Shoulders pattern.