Inverse head and shoulders pattern predicted 9% move in S&P 500 ($SPY Charts)

June 19 inverse head and shoulders w/breakout
It turns out technical analysis still works. The inverse head and shoulders pattern and breakout on June 19, 2012 predicted the 3-month 9% move in the S&P. The market was correctly pricing in positive market catalysts out of the Fed, ECB, EU summits, and German Constitutional Court. I remember posting the chart of $SPY on Flickr, but didn't take it seriously. The head and shoulders pattern is a simple technical pattern used by traders to aid in spotting potential reversals (read more at stockcharts.com: 1, 2).

However, since the bear market ended in March 2009, the Federal Reserve's quantitative easing programs were able to backstop bearish setups entirely (see June 2009, August/September 2010, and hedge fund manager David Tepper on CNBC), which in turn lowered interest rates, raised asset prices, and boosted the economy as a result (maybe not employment). QE2, the Federal Reserve put, was enacted in 2010, and now the Fed just announced QE3. So that's why I wasn't entirely convinced that a new cyclical bear market had begun in June. The pattern seems to be that the S&P 500 and other "risk" assets sell-off when quantitative easing programs end or fiscal stimulus fades (fiscal cliff?).

Technically, the market looks good at this point, I'm not going to deny that. But I still have an overall bearish bias on the market like I did in June. So I guess I'm turning into an overall "perma-bear" at this point. I'm looking out for the next downside setup similar to May-July 2011, when QE2 ended, Congress raised the debt limit, and the U.S. was downgraded by S&P.


As of Friday September 21, 2012 +9%


The Art of the Fed's head and shoulders backstop
(Fed put and Tepper rallies)


Chart sources: FreeStockCharts.com. By the way, you can now get to my homepage via dvolatility.com. Less words to type out.

Related Posts

Comments

HTML Comment Box is loading comments...