Saturday, July 11, 2009

Head and shoulders reversal pattern

Courtesy of www.chartpatterns.com

The above figure illustrates the 'head and shoulders' bearish reversal pattern. This pattern needs confirmation by volume behavior as shown below, courtesy of chartpatterns.com.

The volume is the highest on the 'left shoulder', lower at the 'head' and lowest at the 'right shoulder'.

KL Composite Index has developed a 'head and shoulders' pattern in 1997 at the market peak before the big crash due to Asian financial crisis. KLCI from a height of 1271 in February 1997, it dropped to a low of 262 (-79%) by 1st September 1998. Before the current financial crisis, again KLCI has formed a 'head and shoulders' pattern at January 2008 market peak.


After hitting a peak of 1516 in January 2008, KLCI has formed a small 'head and shoulders' by early March 2008 when the index went below 1350 as shown below.

By July 2008 when the index dropped below 1160, a higher degree (bigger) 'head and shoulders' was formed as shown above pointing to a possible minimum low of around 850. KLCI eventually reached a low of 829 on 29 October 2008 followed by a side-way 'triple bottoms' formation until March 2009.
In the current 'bear market rebound' run-up from March to June, Dow has completed its first wave (wave 1). From the above chart, it is obvious that Dow has formed a 'head and shoulders' reversal pattern. Technically it has to drop to at least 7500.
Besides Dow, S&P 500 has formed a similar reversal pattern.

Other major world indices that have formed 'head and shoulders' reversal pattern are as shown below.



It appears that for quite some times the market won't be good, just hold on to the cash and wait.

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