Is the Reversal Confirmed?

by Jay Pestrichelli on June 19th, 2012

Back on July 12th we wrote about a formation of a Potential Reversal Pattern that could indicate the bottom of the last few months sell off. The pattern is a reverse head and shoulders and it appears that it happening sooner than expected.

Last week we expected the range to stay between 1290 and 1320. The high ended proved right, but the SPX never tested the 1290 level. After 5 days of the second shoulder forming, Friday had a break out up and even after the Greek election, the market continues to run up.
While there’s no exact pattern to follow, on the surface it appears that the formation is confirmed and we should expect the market to continue its upward movement. However two points give me pause.

The first is the second shoulder never really formed. While there is no formula for this, typically, the pattern has the time of the first to extend equally to the second.

The second point is that volume needs to confirm the move. The volume of each trough should be higher than the average. While this happened for the first shoulder and the head formations; the second shoulder does not have the volume of the last two troughs. There was a pop in volume on the 14th, but the rest of the days have been slipping.

This doesn’t mean it all come tumbling down, but it doesn’t give a lot of conviction for the pattern. By the way, this “almost made it” feeling is very common in technical analysis. Despite the name of this kind of analysis seeming to suggest a fair amount of confidence driven by numbers and irrefutable math, technical analysis is actually a study of human emotion. And as we know, there is nothing logical or calculated about human emotions.

Bottom line, don’t consider this to be a confirmed pattern that may or may not suggest a reversal, but rather one that leaves the bulls with some hope that Europe has stopped its drag on the US markets.

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