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Tuesday, 20 April 2010

Two Possible Head and Shoulder Patterns

We had a disturbingly bullish finish to Monday. I read somewhere that 18 out of the last 19 Mondays have been bullish, which sounds about right as I really can't remember the last Monday which closed down.

Overnight we have seen a consolidation on ES that was either an Elliot Wave reverse symmetrical triangle or a high and tight flag, either of which would be bullish, and have broken out at the time of writing to the triangle target as high as 1203 ES before pulling back to just under 1200 ES.

The question is where do we go from here?

I'm still leaning strongly towards a significant top having been made last Thursday, on the basis of the broken wave 5 channel and other indicators, but the bullishness of this market has continuously surprised for quite a while now, and it may be that there is some more upside coming regardless. The next day or two will clarify matters.

For the upside today, looking at the wave 5 channel on the SPX 60min chart, there is an internal channel, marked in black dotted lines, that should provide good resistance at the 1208 SPX level:


As for the rest of the week I am looking at two competing potential head and shoulder patterns that both look interesting. The first is bearish and we would be near the top of the right shoulder at the moment. If it plays out it would target 1150 ES:


The second pattern is bullish and much more speculative, as we would still be making the head on it at the moment, but if we were to reach ES 1207.50 on this upswing and then bounce off, then we would need to consider it as a serious possibility. It is an IHS that would indicate to 1235 ES:


A lot of people have been saying that as and when we do make a major top, then the drop would be so fast that there would be no opportunity to short it near that top. With the greatest respect to them, that very often isn't true. Many wave 2s retrace most of the preceding wave 1 down, the top of the EURUSD advance being a textbook example. We may just be looking at a deep wave 2 retracement here. Significant declines don't have to begin with a Lehman.

Good luck trading today everyone.

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