With all the volatility the last several weeks, the kind I felt might ensue from the small Head and Shoulders formation I told you about on 8-4-11, I feel it is now incumbent on me to have you step back from the close-in “chart stuff” of that day and tell you what I see as a potential for the next 6-12 months. Why? Because there is a possibility that has incredible implications!
Now, don’t get me wrong here. What I am about to unfold to you is a POSSIBLE outcome on the chart, based on a formation that is about 60% finished. Can the unfinished formation fizzle out? Of course. But, with what I will give to you in this article you will have a road map to see if what is happening continues to fit what the current chart seems to saying might happen.
OK. Here we go!
I have included a chart below of the WEEKLY S&P that I have kept for many years. It shows the action since 2008, four years ago. You will note that it shows the huge crash we had in October of that year, the crash I predicted in my column on 8-28-08 of that year, even down to the first target of that head and Shoulder of 900 S&P when we were at the time at 1320 S&P. But, this time around the POTENTIAL Head & Shoulders is starting a bit lower on the charts than in 2008, only meaning that the market never revived from the first huge selloff in 2008.
So far in this new formation, you can pretty clearly see the Left Shoulder that formed from about September of 2009 to about June 2010. That Left Shoulder finished it formation at the low in June of 2010 of about 1000-1030 S&P. From there, we rallied to the high in April of this year at about 1350 or so.
What is happening now is a descent back to the horizontal line I have drawn in at the low point if the Left Shoulder as it completed itself in June 2010 (at about 1000-1030 S&P). This horizontal line is what chartist like myself call the NECKLINE. This Neckline has HUGELY important significance to all that might unfold over the next 6-12 months. But, I get ahead of myself. Back to the descent of the Head area to a possible low of 1000-1030.
If and when we do drop to the Neckline again, I would expect that there would ensue a rally that would then form the Right Shoulder of this formation, carrying us back UP to roughly the same height as the high on the Left Shoulder — at about 1230-50 S&P.
Now, if all this occurs, the next phase should be the last descent back down once more to the NECKLINE. See why it is so important! For if and when this last descent to 1000-1030 phase does occurs the final event will be the CROSSOMG DOWN OF THE NECKLINE. And if and when this occurs, the die is cast. You see, 85-90% of Head & Shoulder formations that do finally cross down the Neckline do “FULFILL” a TARGET the formation predicts.
And what is that prediction?
The formation says that we need to measure the distance from the NECKLINE to the top of the HEAD area (see my green vertical line). This is the distance, at a minimum, that the price will fall from the NECKLINE DOWN to the so-called PRIMARY TARGET!
OK, are you with me so far? Recap for you (1) formation of a Huge Down Head and Shoulders is 60% done as of today; (2) we are now watching to see if the price returns to the 1000-1030 level – the location of the NECKLINE, which will complete what is called the Head area,; (3) we will then watch for a rally back to the low to mid 1200 S&P area, about where the Left Shoulder stopped; (4) then one more descent to the Neckline, which “completes” the Head & Shoulder formation –- which is then followed by the “coup de grace”; (5) the price crossing down of the Neckline. Got it?
Ok, here is what I think all this should mean to your investing outlook.
1. I would be out of stocks until we see if we go down to the 1000-1030 area S&P.
2. If we get there, I might risk up to 25% of my money on what I call the Pillars of the earth stocks, stocks like J&J, McDonalds, Wal-Mart, Microsoft or Apple, Intel, P&G, and others that are very big, cash rich, low debt, everybody needs their product companies, looking for those that are paying good dividends (about 4% is my mark) and a good history of consistent yearly dividend increases.
3. When I saw 1190-1210 if it gets there, I would sell all my stocks and buy puts on the S&P or ETF’s that specialize in shorting the market, but no more that a third of my cash here.
Why would I do the shorting thing? Because if the formation for the last time goes down to the 1000-1030 Neckline mark I would see profits. But, even more importantly, if then the price crosses down the NECKLINE the target is about S&P 700 –- just about the same low we saw in Feb-March 2009. That is a HUGE POTENTIAL target!! End of story.
Again, I suggest that you keep this chart close at hand to keep up on whether the potential parts of the Head & Shoulder formation really do come about. If they do, you have a clear roadmap of what to expect next.
What’s that? Oh, yeah. Yes, the chart might not work exactly to a horizontal neckline. I have seen them with mildly slanted ones. Yes, there is a way to tell if the potential rally that is needed to form the Right Shoulder just keeps on going up. In that case, I usually pencil in a 45 degree down line from the top of the head (about 1350 or so , as you can see on the chart) and if that down line is broken to the up side I am alerted to the possible breakup of the formation. But, I would need a close above the 1270 area for two weeks or more to confirm it.
But, let’s just focus on the finish of the Head part of the formation and the subsequent Right Shoulder for now.
That is plenty to keep us busy. And, as a final note, I would expect the whole formation to be “complete (both Shoulders and the Head don and the price AT the Neckline by sometime in spring or summer of 2012 by my measure of the chart. But, I will leave that time measure explanation for another day. Just take it as the best measure of time I can give you right now.
Well, I told you at the start this was a very important article. I hope you too can agree with that assessment by now. Don’t know when I’ll put up my next column with the Bawld Guy, but check back every week to see. Until the next one, as ever, you keep in touch! I do! See you then. As ever Max Whitmore.
BawldGuy Here: A couple things. First, If Max is right, those with well located, cash flowing real estate investment property will do far better than those in the stock market. Yeah, I know, I’m channeling Captain Obvious, but it needed to be said.
Second, Max has volunteered to send readers who want it, the chart shown above. Just email him at maxxle@aol.com — and put WANT CHART in the subject line.
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Very interesting food for thought Max. It also appears with the high volitility that metals will continue to be a good safe haven. Considering the breakdown in the EU do you believe its possible a right sholder never fully forms? If I’m understanding your chart correctly that would be indicated by a sustainded break of the Neckline, lets say to 970?
Appreciate the expertise again!!! I play the market like a fool, stuck in the mindset that the market will keep going up, and seeing explanations like this make so much more sense than playing by instincts or listening to talking heads on the tv.
Mahalo also Jeff for providing the opportunity to get the chart from Max as well as continually giving us good advice.
I have been studying the charts over the last few weeks and I was envisioning the same thing, that right shoulder. I believe it is possible that the next few weeks we could make that right shoulder on a oversold rally bounce. This would only come to light if the 1080-1100 holds this week. I think we go back up and test the 1250 neckline with a failure and then slowly roll over in late September and October and achieve the 1000 S & P and stay in a trading range for a while. Market will finally give way, when all the data reporting begins in late October reflecting the recession we are in now. I not a gloom and doomer type person, but I have been out and about and restaurants are empty and mall parking lots are sparse. I think certainly 880-980 is possible in October, but it wont be a straight line down, it will have many oversold bounces to allow people to exit. Just my opinion though and that is what makes a market, if we only all had the crystal ball. Happy trading and dont forget capital preservation is the only way to stay in the game. Best regards. Liz
Thanks, Aunty. I do my darnedest to ensure any contributors here of first rate, highly experienced, pros. Max is the gold standard.
Welcome, Liz. If I’m not mistaken, you’re in Fresno. If correct, that area’s retail parking lots have been barren for years now. I’m not sure they’re a solid barometer for the economy right now. Maybe Max will have something to say.
Don’t be a stranger.
Yes, from Fresno. We successfully hit the target of 1230. So now the question is to we first do a retest of 1101 again, possibly the week of Sept 12, and go back and make another run at 1250. That would really confuse people.
Then in October all breaks lose and we fall to 1030, after the third retest of 1101. Seems like the third time always fails. I am being very cautious, but day trading and not staying in overnight with such a high VIX… Liz