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Reverse H/S Patterns In Play

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Friday morning, the Morgan Stanley Cyclicla Index may have been a key sector/index when broader weakness was found. The "right shoulder" on the smaller 60-minute interval charts I had alerted traders to Wednesday evening were being tested at about 10:30 AM ET.

Morgan Stanley Cyclical Index (CYC.X) - 60 minute intervals

[Image 1]

One note I made to traders based on some experience with these patterns is that it isn't unusual to see a slight violation of the shoulder, or undercutting on an h/s bottoming pattern, where some "bullish stops" get triggered in order for weak hands to pass the stock to strong hands if the pattern is to still unfold. Using the CYC.X as a guide Friday afternoon, or here this morning, we can begin to understand just how far a bull/bear could still be looking for these patterns, but more importantly, WHERE/HOW to set a stop.

For example; Friday morning's undercut on the CYC.X was 1.69%. IF a trader was playing the pattern, then a 1.8% stop UNDER the left shoulder would have been a GOOD technical stop as it would have allowed the trader enough room to try and let the pattern play out. Otherwise, concede the loss and move on to another trade, or begin to REALIZE that these patterns were NOT playin gout.

Here this morning, the CYC.X has GAPPED above its NECKLINE and technicianls would now begin to assess that these patterns are "in play" and upside objectives look to be "in play."

Here's a montage of the S&P 500 (SPX.X) and its tracker the S&P Depository Receipts (SPY) on a 30-minute interval.

SPX and SPY Montage - 30-minute intervals

[Image 2]

I set the cursor boxes on the 10:30-11:00 AM ET interval from Friday so we can begin to make a tie between a sector/index like the CYC.X and the broader SPX/SPY.

As identified Wednesday evening, the "key level" for the SPX near term at 818 was being tested and we were on the alert for a possible FAILURE of the reverse h/s pattern on the 60-minute interval time frame.

But the FAILURE didn't happen and this morning, we've got a strong move higher in the SPX ABOVE its MONTHLY Pivot. Some the SPX has NOT been able to do so far this month!

The SPY chart gives us our h/s bottom pattern and here we see a gap to/above the neckline of the pattern.

Using the CYC.X observation of just how far it did "violate" the shoulder, perhaps having some bulls stop out, or some bears actually go short some of the components, we now get the observation that STRENGTH of buyers is taking hold.

For now, BULLS can play long, but the SPX/SPY should NOT move more than 1.8% below the now formed RIGHT shoulders!

The tables have turned and now BEARS should be assessing RISK to OBJECTIVES of the reverse h/s patterns identified.

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