Sunday Musings: Losing A Head And A Shoulder

What a difference a few weeks can make. In “Chart Patterns” I examined a huge Head-and-Shoulders (H&S;) formation that the S&P; 500 had formed early in October. Here’s what I said:

…if prices rally from the top of the right shoulder and end up rising above the high point the “Head” has made (April 2010), all bets are off, and the bullish trend is likely to continue.

That is exactly what happened last week. Strong upward momentum took out the right shoulder and prices extended above the Head (red arrow). The updated chart now looks as follows:




[double click on chart to enlarge]

From a technical point of view, this means the bullish trend is back on. Its duration will be the great unknown. However, for those following chart patterns a new one will have to develop before any other conclusions can be reached.

As I said before, the Fed’s QE-2 efforts are a step into the unknown and into unchartered territory where certainly unintended consequences will appear when least expected. Just because we’ve taken out the old highs of 2010 does not mean all will be smooth sailing from here on forward.

On the contrary, while the focus of late has been on domestic issues like the elections, QE-2 and unemployment numbers, let’s not forget that we also have a struggling global economy with its own issues. Anytime, an unexpected external event can have an effect on the domestic market by derailing the current trend.

I am not being negative here, but merely realistic as I am observing that investors can easily throw caution to the wind. Let me be the voice of reason and tell you to always be cautious and to never ever abandon your exit strategy.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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