Potential Reversal Pattern Forming

by Jay Pestrichelli on June 12th, 2012

Since April, the market has been in a downward trend although we typically don’t use technical to make investment decisions, there appears to be a popular pattern forming. That pattern is a reverse head and shoulders. And while we're not CMT (Chartered Market Technicians), it doesnt mean we won't call out patterns like this when we see them.

This pattern is the inverse of the typical head and shoulders pattern and is identified as 3 successive troughs with the middle one, the head, extending the deepest. This pattern, when completed, marks a reversal from a downtrend to an uptrend and is typically accompanied with larger than normal volume at the bottom of the formations.

Here’s an example of one from StockCharts.com
While no pattern is confirmed until it has been completed, the S&P 500 right now appears to have already formed the left shoulder and the head and is in the process of forming the right shoulder.
In order for the patter to complete, the right shoulder will need to be formed. That means some sideways trading between 1290 and 1320 for about another week. If that should happen, look for a break out above the neckline to confirm the pattern and wait for the reversal to begin.

Of course this can all be thrown out the window if the SPX drops below the lowest level of the head portion of the pattern. If that is the case, consider it to just be a continuation of the downward trend of lower lows and lower highs. This is why we don’t suggest jumping the pattern, because it can easily turn into something else; however, this one has got 2 of the 3 needed parts the bulls are hoping for.

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