Upside Down Head & Shoulders?

Now that the market isn’t free falling every single day, we can get back to selecting what looks good to buy, technical analysis, etc.  We have various charts that are starting to look constructive.  Now, before we all get too excited that we could be setting up to have our first back to back up day this whole month, caution is still warranted.  There are not green flags just yet.  But, things are definitely getting better.

One positive I’m seeing is a potential pattern developing in the Dow Jones (and probably other indexes as well) that could be bullish for the medium term.  You’ve all heard of a head and shoulders pattern.  This is typically negative.  It’s when a stock or index makes a high, pulls back (that’s the left shoulder), goes to an even higher high, pulls back (that’s the head), and then makes a lower high (that’s the right shoulder).  That pattern typically precedes a fall in the particular investment you’re watching.

Well, I’m noticing the making of an upside down head and shoulders pattern which is bullish.  As you can see from the chart below, we made a low on October 10th.  Then we made a lower closing low on October 27th.  If we came back and went down but didn’t close lower than 8451 (the October 10th close), we could be off to the races.

I think this rally can take us to Dow 10,000 fairly easily.  But, it may not be straight up.  We’re starting to get 2 steps forward and 1 back which is ok compared to 10 steps backwards and 0 forward as we’ve been most of October.

I will caution you that today had very light volume.  We need to be rallying on heavier volume.  If you have large positions that are highly correlated to the stock market and you don’t want to ride them back down, put stops underneath them.  As the market moves up, continue to move your stops up as well.  Not a bad week though.

Have a nice weekend.

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October 2008
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