Friday, June 25, 2010

Technical Take - Head & Shoulders Top Developing?

Technical analysis can include many elements, such as trend following techniques, pattern recognition, sentiment analysis, mean reversion, etc. Technical analysis is one of the three building blocks in determining a view at Pinnacle Advisory Group, Inc. We currently view the technical conditions of the market as extremely important at this time.

One highly recognized pattern in the market place is called a head and shoulders top. It’s name comes from the shape, which is made up of a left shoulder, a head, and a right shoulder (see picture below). This pattern usually forms after an uptrend, and it’s completion typically marks a major trend reversal in the markets. Right now the S&P 500 is potentially forming a head and shoulders pattern, which has technicians buzzing. At the moment, the pattern hasn’t confirmed that a change in trend has occurred. That would occur if the SP drops below what is considered the neck (at a price below 1040-where we have our stop currently). The pattern could also be negated if the S&P 500 rises above the head, somewhere north of 1120. We still have hope that the market can grind higher after we get through this volatile period. But as some of the previously bullish evidence has deteriorated, we feel that it is important to have a protective strategy in place. Our line in the sand is at 1040 on the SP 500.