A question for the follower of chart patterns is sometimes which one to follow and give credence to. The answer I've found is to follow EVERY pattern that is recognizable and see which one turns out to be the most 'predictive' regarding the trend or any trend reversal.
Sometimes a predictive implications for a certain chart pattern is solely a downside objective, sometimes a slightly different pattern will have both upside and downside objectives depending on whether there's an upside or downside breakout.
And finally, there can be a pattern that is predictive for a top or bottom, but the same pattern implies NO 'measuring' implications for how high or low the new emerging trend will carry. This is probably the most common situation.
Fortunately, in our current unfolding market trend, there are at least patterns in the S&P that will suggest some next price swing objectives if prices break under OR above recent lows or highs respectively.
In the Nasdaq it's a little different and we can only look to a prior low as a possible downside objective, but the top that was traced out was pretty definitive. Seeing a definite top form is of course extremely valuable for those plying bullish options strategies as it can otherwise be tough to know when to take profits, cash in, take the money and run.
As always pictures are worth thousands of words here and I'll do a technical review of the predominate technical chart patterns the market has cooked up. Speaking of 'cooked up', I'm holed up in air conditioned LA, having come down the coast from the much cooler northern coastal climes. Ekes, it's suddenly summer! I'm suffering weather shock but will do the best I can.
This is basically a sideways trading range that has 2-3 or more touches to the same or similar highs and 2-3 or more touches to the same or similar lows. The pattern when traced out looks like a rectangle and a breakout above or below this box like structure has measured move implications. The price range ADDED to the top end of the trading range gives an idea of a minimum upside (breakout) objective; there's no 'maximum' objective here.
The same price range SUBTRACTED from the low end of the box gives an idea of a minimum downside (price) swing objective, without implying a maximum downside target.
I've been discussing this idea previously in Trader's Corner article or in my regular 'Index Trader' weekend columns. A question is what makes the pattern highlighted below a rectangle TOP? It's just assumed that if the trend preceding the formation is UP, the pattern is a top.
However, it's ALSO assumed that prices may just continue to swing back and forth in the establish range and at some point there's the possibility for an UPSIDE breakout and then the pattern becomes a continuation (of trend) pattern RATHER THAN a reversal pattern as implied by 'top' pattern. Hey, if anything technicians are flexible in their interpretations; maybe too much so!
What gives a twist to following highlighted pattern in the S&P 500 (SPX), with targets noted for both upside and downside breakouts, is that the same pattern can be 'read' a different way, also as a top but with a more definitive implication that what you see IS a top. My next (second) chart will highlight a possible Head & Shoulder's Top.
Before escaping from the SPX chart seen above, note the other technical aspects implied by the decline (finally) of the Relative Strength Index (RSI) toward the lower oversold zone that was associated with the early-March low. Also seen above, the decline in bullish sentiment (at bottom) is apparent recently. 4One more shot down would put these indicators into a definite 'oversold' buy the market kind of scenario.
HEAD SHOULDER'S TOP PATTERNS
The Head and Shoulder's Top pattern is a very reliable 'top' indicator as far as chart patterns. So much so that some traders I know will ASSUME that the second rally failure occurring in same area as the FIRST (rally failure) ought to be shorted when put premiums haven't shot up yet. This BEFORE the 'confirming' sign of this type top, which is when the so-called neckline is pierced; e.g., here in the S&P 100 (OEX) at 412.
In the Indexes, as opposed to seeing this pattern in stocks, I'm not always ready to jump into puts on the rally failure at the third and last high; what is termed the 'right shoulder' of the H&S pattern. So, the other shoe may be about to drop or least a break of 412 and a 'minimum' downside objective to 380 in OEX. A move down to this area (380) would carry OEX down toward prior important lows.
Stay tuned on this outcome! The point here is that looking at the S&P (both SPX and OEX) as a Head & Shoulder's Top makes it look to technician types like there's definitely more downside to come, end of story, and it's sure to follow. And, the 'line' for lows forming the 412 neckline likely to give way.
A 'SIMPLE' TOP OR 'DOUBLE TOP' PATTERN
Last but not least, in the case of the Nasdaq market, what has been traced out is a simple, not a 'complex', top. Where prices break from a new high and pierce a well-defined up trendline. A rally back to the trendline fails to get back ABOVE the trendline, indicating that this line has 'become' a kiss of death resistance trendline. The rally is toast at some point, and the second rally probably won't re-test its prior high. It (the second high) got close in this instance, but no cigar and no collect of 200 for passing go.
In the case of the Nasdaq Composite (COMP), there's now a question of whether COMP will retest its first key prior low; e.g., in the 1665 area. This area is not far above the 200-day moving average. If this tech rally is true so to speak, the index ought to hold at or near its 200-day average.
An implication for how MUCH downside can be implied by the COMP chart top pattern described and seen below is nil, nada. We can look at the common percentage fibonacci retracements but that's a different technical consideration.
The only thing the below COMP chart pattern would suggest based on the top that's formed to date is that the intermediate-term trend would REVERSE (to down) IF the prior COMP low around 1665 gives way. But that's not a minimum targeted objective, more a statement anticipating that the price momentum tipping point where price momentum becomes more to the downside.
GOOD TRADING SUCCESS!