Are We Seeing the Largest Bearish Head & Shoulders in 100 Years?

November 9th, 2012

by Chris Kimble

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

The two-pack below suggests that the NYSE Composite and Wilshire 5000 index could be forming one of the largest "Bearish Head & Shoulders" patterns in the past 100 years.

I created this chart for Premium, Sector/Commodity Sentiment and Global Dashboard members a few weeks ago.

I am a believer in the following principle: It's not the odds of something happening that is key; it's the impact if it does!

Pattern analysis is an art, not a science. The odds are low that this pattern will play out as illustrated above. But if the bearish H&S outcome unfolds, the impact would be large. How large? Head & Shoulders topping patterns usually trade at least back down to their necklines, and the necklines in the two-pack are more than 40% below current prices.

A little reminder….I am NOT a Bull nor a Bear. I don't create these patterns (millions of people made these patterns over the past 20 years, not just me). I am simply sharing what the patterns could be suggesting.

I will be very happy to be wrong on this read and will gladly accept the egg on my face. If I end up giving you a good laugh on this analysis, we are ALL WINNERS, because that means the market didn't suffer a large decline. Many investors are already rather bearish at this time (which is often seen from a contrarian perspective as a bullish indicator). Outflows from stock funds has been almost $400 Billion over the past four years (see feature on the outflows here). Maybe those out flows and my focus on the bearish pattern will keep the H&S from taking place! I certainly hope so.

Again, let me emphasize: This is my observation of a pattern… not a prediction!

I detailed this H&S pattern and other similar patterns in a 90-minute workshop a couple of months ago. If you would like to view the full workshop click here.

If you would like to see a free condensed version of the workshop click here.

Technical Footnote : Should we respect the fact that the Dow is at the top of this 70-year channel and is attempting to break support of a rising wedge?

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