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 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: By the way, you can now get to my homepage via Less words to type out.

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