Dow Weekly H & S Pattern Broken to Downside

H

Harry123

I am seeing so many threads after a day like today stating that the markets are going to come back on Monday or overall and run back up to 14K. I am also reading about how the markets will fall out of bed this week etc etc.

Here is a weekly chart of the Dow showing the Head and Shoulders formation that has been forming for 8 months now. Today the Dow pierced the neckline to the downside on a closing basis.

Now what does that mean?
For someone like myself who trades off the charts and experience etc..I will be using the broken neckline as a signal that there may be a true change in trend here for a number of months (downside that is).

I wll also watch the neckline and see if the Dow can muster the stregnth to rise back above and cause a short covering rally if this is indeed a false break.

Either way I will trade my stocks and futures with the understanding that right now in my world an intermdiate bear signal has shown itself. As always I will remain flexible with my eye on the neckline and the possiblity of a false break, in order to take advanatage of opportunites to the upside should that be the case.

See attached..good luck in your trading this year.
 

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the neckline low is 12724;the november low. if that is broken on a closing basis,then its real trouble. the naz has to break below 2500 and s&p under 1406.
 
I guess it all depends on your interpretation of Edwards and Magee (you are basing your analysis on them, aren't you? :) ).

Seriously though, they always draw their necklines across the bottom of the bars, not across the closing prices as you have done with your line chart. This produces an up-sloping neckline which is just now being touched by prices on this latest downswing. Still a H & S top in the making.

Volume isn't strictly ideal (again, according to E & M). There was no volume spike at either the top of the left shoulder or the head; in both cases the volume spike occurred 5 and 3 weeks earlier, respectively. We'll have to wait to see what happens for the rest of this week, but volume will probably be greater that usual.

Last, even if your neckline is taken, price has not breached it by the required amount (3% according to E & M) setting up the weak rally back to the neckline and subsequent failure.

However, it is shaping up for sure and if the pattern completes, we should have a fairly reliable indication. Next few weeks will be very interesting.
Quote from enforcer99:
the neckline low is 12724;the november low. if that is broken on a closing basis,then its real trouble. the naz has to break below 2500 and s&p under 1406.
More...
Not sure where you're getting that. What's the 2nd point of reference for your neckline before the Nov. low? You need another point to define it, right? Wouldn't it be the August low?
 
Quote from traderNik:

I guess it all depends on your interpretation of Edwards and Magee (you are basing your analysis on them, aren't you? :) ).

Seriously though, they always draw their necklines across the bottom of the bars, not across the closing prices as you have done with your line chart. This produces an up-sloping neckline which is just now being touched by prices on this latest downswing. Still a H & S top in the making.

Volume isn't strictly ideal (again, according to E & M). There was no volume spike at either the top of the left shoulder or the head; in both cases the volume spike occurred 5 and 3 weeks earlier, respectively. We'll have to wait to see what happens for the rest of this week, but volume will probably be greater that usual.

Last, even if your neckline is taken, price has not breached it by the required amount (3% according to E & M) setting up the weak rally back to the neckline and subsequent failure.

However, it is shaping up for sure and if the pattern completes, we should have a fairly reliable indication. Next few weeks will be very interesting.

Not sure where you're getting that. What's the 2nd point of reference for your neckline before the Nov. low? You need another point to define it, right? Wouldn't it be the August low?
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Nick, stole a chart from the post I mentioned...as much as I agree with your perfect assessment of a H&S I think the strong argument the guy at the tradeforgain blog is making is that it's testing support for the 3rd time... Perfect H&S or not is not the point... it's just an ugly pattern :-)

attached is the chart I stole from his blog..
<img src="http://www.elitetrader.com/vb/attachment.php?s=&postid=1737083"></img>
 

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And there was another example of H&S too... on the SMH

<img src="http://www.elitetrader.com/vb/attachment.php?s=&postid=1737085"></img>
 

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Quote from 4XIS4U:

Perfect H&S or not is not the point... it's just an ugly pattern :-)
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Yes, definitely ugly. Or beautiful, I guess. : )

That SMH pattern is also pretty clear.

Of course it's an inexact science. Let's see what happens for ther rest of the month. It's weird how the macro events like Helicopter Ben and his bailouts create the same old patterns...
 
Quote from traderNik:

I guess it all depends on your interpretation of Edwards and Magee (you are basing your analysis on them, aren't you? :) ).

Seriously though, they always draw their necklines across the bottom of the bars, not across the closing prices as you have done with your line chart. This produces an up-sloping neckline which is just now being touched by prices on this latest downswing. Still a H & S top in the making.

Volume isn't strictly ideal (again, according to E & M). There was no volume spike at either the top of the left shoulder or the head; in both cases the volume spike occurred 5 and 3 weeks earlier, respectively. We'll have to wait to see what happens for the rest of this week, but volume will probably be greater that usual.

Last, even if your neckline is taken, price has not breached it by the required amount (3% according to E & M) setting up the weak rally back to the neckline and subsequent failure.

However, it is shaping up for sure and if the pattern completes, we should have a fairly reliable indication. Next few weeks will be very interesting.

Not sure where you're getting that. What's the 2nd point of reference for your neckline before the Nov. low? You need another point to define it, right? Wouldn't it be the August low?
More...

Trader I hear ya...I can also see its not the wonderful looking H&S pattern when taking a look at the bar chart. However the beauty of the line charts is they really hide the noise well and let you see what subtle moves have already occurred without all the noise.

In the past however I have come to conclude that when it comes to patterns on the major indicies the accuracy is usually very low and most patterns never run the full course before a major reversal.

Hence however I will still use the clossing H&S as my signal to basically use the neckline on the closing basis chart as my piviot point for shorts or longs.
 
Quote from Harry123:

Hence however I will still use the clossing H&S as my signal to basically use the neckline on the closing basis chart as my piviot point for shorts or longs.
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Fair enough, you have to go with what you believe in. As you said these things are rarely textbook. Let's see what happens.
 
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