In my 4/1/19 post “Gold Cross Confirmation” I replied to a question about the SPX 2872 price level. First a clarification of my comments about Head & Shoulder (H & S) patterns. It is a valid pattern to discover potential trend changes. I think if used properly it could be effective in any market or stock. From my experience I doubt it is very effective on the SPX because that index is so widely followed. There are probably some instances when H & S has signaled an SPX turn – I haven’t seen any yet.
My thoughts about using H & S and the supposed H & S – SPX pattern from January 2018 to April 2019 are listed below.
1) If everyone knows something its not worth knowing: Knowledge of H & S is not universal but it’s probably the most widely known pattern. Most big market turns come as a surprise; the most recent example is the SPX late December bottom at 2346. Did you recognize a major SPX bottom being made at the end of last year? I can just imagine thousands and thousands of traders all over the world seeing a multi – month SPX – H & S pattern thinking they are about to get rich shorting the SPX. Sorry, its not that easy. The riches from the markets are for those that have done a lot of hard work sifting through many pieces of evidence not just one widely known pattern.
2) Is the SPX top at 2872 still resistance? In January 2018 the SPX peaked at 2872 then dropped to 2532 and then began another bull phase. In August of 2018 the SPX broke through the resistance at 2872 and in September 2018 made a new resistance level at 2940. After a resistance level is broken its broken! You can’t say something is a barrier after its gone. If you had a wall protecting your property and the wall is knocked down, you can’t expect trespassers to be deterred by a barrier that’s not there. Subsequent to the top at 2940 the decline did set up an area for subsequent resistance, this was the SPX triple top made in the 2800 to 2016 area. After that formidable obstacle was breached there was no chart or Fibonacci resistance until the 2940 area. Regarding the SPX rally from late December, 2872 only becomes a factor as a potential chart pattern – the right shoulder of a possible H & S, not resistance.
3) Has the SPX formed an H & S from January 2018 to April 2019? Illustrated on the SPX chart is a text book H & S pattern. The following is from a definition for H & S patterns that I found on the internet.
“Please note the neck line isn’t always flat. If the peak or trough values are slightly different, then the neck line could have a slope.”
The key word is “slightly”. The difference between the February 2018 trough and the December 2018 trough is 7.3%! I can understand a difference of 1 or 2% but 7.3% is ridiculous. This also creates a problem with the supposed right shoulder. Do you measure the right shoulder at SPX 2660 which is 7.3% below the January 2018 peak or could it be higher at 2700 or 2750? Also, since the right shoulder can exceed the peak at 2872 the supposed right shoulder could go all the way to SPX 2939 before the pattern is invalidated. The range to short the SPX is from at least 2939 to 2660. If this is what it takes to catch a market turn you can have it. I want no part of it.
To discover market turns you need a comprehensive plan and use factors from all four market dimensions; Price, Time, Sentiment, and Momentum.
Within each dimension use several different indicators and patterns and make your market decisions based upon the weight of the evidence.
There are no magic patterns or indicators and reliance upon just one greatly diminishes your chances of success.
Mark
My thoughts about using H & S and the supposed H & S – SPX pattern from January 2018 to April 2019 are listed below.
1) If everyone knows something its not worth knowing: Knowledge of H & S is not universal but it’s probably the most widely known pattern. Most big market turns come as a surprise; the most recent example is the SPX late December bottom at 2346. Did you recognize a major SPX bottom being made at the end of last year? I can just imagine thousands and thousands of traders all over the world seeing a multi – month SPX – H & S pattern thinking they are about to get rich shorting the SPX. Sorry, its not that easy. The riches from the markets are for those that have done a lot of hard work sifting through many pieces of evidence not just one widely known pattern.
2) Is the SPX top at 2872 still resistance? In January 2018 the SPX peaked at 2872 then dropped to 2532 and then began another bull phase. In August of 2018 the SPX broke through the resistance at 2872 and in September 2018 made a new resistance level at 2940. After a resistance level is broken its broken! You can’t say something is a barrier after its gone. If you had a wall protecting your property and the wall is knocked down, you can’t expect trespassers to be deterred by a barrier that’s not there. Subsequent to the top at 2940 the decline did set up an area for subsequent resistance, this was the SPX triple top made in the 2800 to 2016 area. After that formidable obstacle was breached there was no chart or Fibonacci resistance until the 2940 area. Regarding the SPX rally from late December, 2872 only becomes a factor as a potential chart pattern – the right shoulder of a possible H & S, not resistance.
3) Has the SPX formed an H & S from January 2018 to April 2019? Illustrated on the SPX chart is a text book H & S pattern. The following is from a definition for H & S patterns that I found on the internet.
“Please note the neck line isn’t always flat. If the peak or trough values are slightly different, then the neck line could have a slope.”
The key word is “slightly”. The difference between the February 2018 trough and the December 2018 trough is 7.3%! I can understand a difference of 1 or 2% but 7.3% is ridiculous. This also creates a problem with the supposed right shoulder. Do you measure the right shoulder at SPX 2660 which is 7.3% below the January 2018 peak or could it be higher at 2700 or 2750? Also, since the right shoulder can exceed the peak at 2872 the supposed right shoulder could go all the way to SPX 2939 before the pattern is invalidated. The range to short the SPX is from at least 2939 to 2660. If this is what it takes to catch a market turn you can have it. I want no part of it.
To discover market turns you need a comprehensive plan and use factors from all four market dimensions; Price, Time, Sentiment, and Momentum.
Within each dimension use several different indicators and patterns and make your market decisions based upon the weight of the evidence.
There are no magic patterns or indicators and reliance upon just one greatly diminishes your chances of success.
Mark