In my previous posting I put forward a mini trivia question on a portion of price action in the sp500 that shows what appears to be a bullish inverse head and shoulders pattern. But is it really bullish?
I have pointed out in some past posts that inverse head and shoulder patterns that form near the very top of a market advance are probably less favorable than inverse h&s patterns that form after an extended market decline. I do not have statistics to back that up, but it seems like a natural conclusion simply from a risk reward standpoint where price is trading in the phases of a trading cycle.
So the answer to the trivia question is JUNE TO OCTOBER 2007. What is important about June to to October 2007 ??? This period was the final top of the period 2007 and right after the inverse head and shoulders pattern completed the market went onto dive into one of the greatest most devastating bear markets in market history.
Curiously we now have another inverse head and shoulders bottom in the sp500 in the 2011 time frame with a debt deal as an apparent deadline for market deciding type action. It would seem we are at almost the same juncture in terms of pattern similarity.
So does the debt deal get passed and the DJIA blast up 500 points and keep the bullish scenario going ? or does the market top out very similar to 2007 and then start another long devastating bear into 2011 and 2012 ?
I wish I had a specific answer, but the chart below shows the setup and the potential for us to be at an extreme bearish type top.
I think bulls need to be careful about being arrogant in the current time frame about bullish prospects for the sp500. Yes a bullish scenario exists and could evolve into August and September 2011 but there is still a % chance of a mega bear developing from the very near term time frame. The MONTHLY chart is what has kept me open minded to a MEGA BEAR scenario.
I can tell you with ZERO DOUBT that if the right portion of the chart above starts to play out like the 2007 top then BestOnlineTrades will switch to BOT SHORT and STAY BOT short for a long time.
What is so fascinating about the 2007 chart is that the market transformed into one of the worst bear markets in all of market history right AFTER the inverse head and shoulder pattern was completed!!! (big red arrow on left portion of chart above).
Is it fair to make a comparison to the 2007 top to the current 2011 trading range ? Not exactly. The monthly MACD in November 2007 was right at a bearish crossover point. Currently the market is showing that the monthly MACD is not at the bearish crossover point, BUT very devastating and bearish price action in AUGUST 2011 could really help the monthly MACD turn DOWN hard.