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NASDAQ: Classic Head-and-Shoulders & Blow-Off Top?

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If the advance from January 2013 to the top in early 2014 isn't a blow-off top, it's certainly a pretty good imitation of one.

Technical analysis seeks to identify trends and recognize signals. The predictive value of trends (up, flat or down) and signals (buy, hold or sell) is self-evident, hence the widespread interest in charts of price and various indicators.

It's easy to overwhelm the senses with complex analysis, so let's try to strip down our look at the NASDAQ stock index to bare essentials. The opportunities to load up any chart or analysis with complexity are endless in an age of data and cheap computational power, and the risk is we miss the forest for the trees.

Let's start with a short-term chart of the NAZ. The classic topping pattern is called head and shoulders because as doubts about the Bull Market start to creep in, sellers take the market down. This forms the left shoulder.

Despite narrowing breadth and weakening volume, true-believer Bulls ("this time it's different") push the index to new highs. This forms the head.

The weakening participation (i.e. the market has run out of new buyers) eventually causes the market to sell off again. But Bulls, well-trained to "buy the dip," come back in and the index rallies, but not to the previous high. This forms the right shoulder.

Once the Bulls realize the rally is over, selling begins in earnest as participants sell to lock in gains/limit losses. Selling begets selling and a Bear market ensues.


MACD and Chaiken Money Flow reveal the decline in technical underpinnings.

The long-term chart helps us answer the question, is this a blow-off top? Another classic pattern is an A-B-C-D series, in which the first leg up is followed by a decline that is then followed by a third leg that is roughly twice the size of the first advance.

Interestingly, the NASDAQ index has traced out a textbook example of this pattern: the A leg from the 2002 low of 1,114 to the 2007 high of 2,841 is an advance of 1,747. The B decline from 2,861 to the low in March 2009 of 1,265 is 1,596 points, and the subsequent C leg reached 4,371 in 2014, a rise of 3,106 points--pretty close to double the A and B legs.

If the advance from January 2013 to the top in early 2014 isn't a blow-off top, it's certainly a pretty good imitation of one. If a 45% leap in a little over a year doesn't qualify as a blow-off top, then what does?

If this A-B-C pattern plays out, the NASDAQ should experience a major D leg decline. A hefty 30% decline would simply return the NAZ to its pre-blow-off level around 3,000. Some projections call for a much more severe decline, but we'll take each development as it comes.

If the NASDAQ surpasses the high of 4,371 and moves higher, the head and shoulders pattern is negated. If the NAZ fails to rally to new highs, that could be a signal that the rally from 2009 is reversing or has entered a new phase.

 

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Sun, 05/04/2014 - 16:55 | 4726498 royal
royal's picture

Nice observation, Tyler.

There's head and shoulders forming on the Russell 2000 (RUT) as well.

And interestingly, an inverse head and shoulders is forming on Gold and the gold-miner ETFs, GDX and GDXJ.

Sun, 05/04/2014 - 17:14 | 4726591 flacon
flacon's picture

Interesting that QQQ made it up to test the 50 dma, but $COMPQ did not. See here:
http://stockcharts.com/h-sc/ui?s=QQQ&p=D&yr=0&mn=3&dy=0&id=p01540535484

 

Sun, 05/04/2014 - 17:17 | 4726598 ilion
ilion's picture

Warren Buffets favorite indicator tells us a lot about the stock market valuation. Chart here

Sun, 05/04/2014 - 19:48 | 4726926 medium giraffe
medium giraffe's picture

The strangest thing about mean reversion is market participants' inability to remember that mean reversion is a serious consideration.

Sun, 05/04/2014 - 20:12 | 4726986 hootowl
hootowl's picture

Ehhhhh.....what?

Mon, 05/05/2014 - 01:24 | 4727509 Manthong
Manthong's picture

E=1550
F=666

Sun, 05/04/2014 - 20:00 | 4726958 Dr. Engali
Dr. Engali's picture

Does your equities to GDP indicator take into account the new formula for calculating GDP? Don't forget they threw in intangibles, which makes current a GDP much lower with the old calculation.

Sun, 05/04/2014 - 17:15 | 4726594 Landrew
Landrew's picture

The article written by Charles Hugh-Smith of OfTwoMinds blog,. Let's give credit where credit is due

Sun, 05/04/2014 - 17:17 | 4726599 max2205
max2205's picture

Call me when the fed quits putting 40 bill per month in the market

Sun, 05/04/2014 - 17:56 | 4726678 SAT 800
SAT 800's picture

Short right now @1873.25 X4 contracts ES. basis June '14. the way to read the above chart is to look at the line upward from the '13" onward; it increases it's angle to 60 degrees; this is unsustainable; that whole part of the chart is the "blowoff phase"; which is now ended; the market has already failed overhead.

Sun, 05/04/2014 - 18:00 | 4726688 SAT 800
SAT 800's picture

The difference between the above price and the spot on Marketwatch is the forward basis; which as you can see is Bearish; for good reason; the people on the CME trading contracts are quite a bit more sophisticated than Mom and Pop with their Netflix shares. Marketwatch is carrying a sub-banner today that says, "market advancing on Optimism"; what else do you need to know. Optimism is called tulip mania; the mass mind, the greater fool.

Sun, 05/04/2014 - 20:11 | 4726981 hootowl
hootowl's picture

.........And just where do you fit into all of this that you disparage?

Sun, 05/04/2014 - 18:04 | 4726699 SAT 800
SAT 800's picture

The difference between the above price and the higher price on Marketwatch rightnow; is the forward basis; which is bearish; for good reason.

Sun, 05/04/2014 - 18:30 | 4726770 Redneck Hippy
Redneck Hippy's picture

Let me see if I've got this straight;  "If the NASDAQ surpasses the high of 4,371 and moves higher, the head and shoulders pattern is negated."  

 

So technical analysis shows that the market is going to fall, unless it doesn't, in which case it won't.

 

Charting is a piece of cake.


Sun, 05/04/2014 - 20:04 | 4726965 SloMoe
SloMoe's picture

Often wrong, never in doubt...

Sun, 05/04/2014 - 20:27 | 4727022 A Nanny Moose
A Nanny Moose's picture

Market? What market? There is no market, only a wealth siphon with a clever facade.

Sun, 05/04/2014 - 22:47 | 4727291 DeadFred
DeadFred's picture

The good part of technical analysis is that the charts give you good guesses on both when events will happen and even a guess on how much it will happen. Only time will tell you IF it happens. When I look at this chart I see a neckline that will break at about 3920. You should be able to get a clue about where the NASDAQ will drop to after the neck breaks but the target point is so far down that it makes me dizzy. Don't buy the dip after the first crash later this month because there's a lot of room for this puppy to drop.

Sun, 05/04/2014 - 16:34 | 4726501 sunny
sunny's picture

To say nothing of a series of lower highs and lower lows.  Note that the Russell 2k is in the same situation.  Sorta makes one wonder.

Sun, 05/04/2014 - 16:40 | 4726514 g'kar
g'kar's picture

Haven't heard from the Goodyear blimp omen in a while.

Sun, 05/04/2014 - 17:02 | 4726567 Sudden Debt
Sudden Debt's picture

or the zirkonia parterns that go with it

Sun, 05/04/2014 - 20:16 | 4726936 g'kar
g'kar's picture

Everything the FED touches are zirconium patterns for the beautiful people.

Sun, 05/04/2014 - 16:42 | 4726516 CrashisOptimistic
CrashisOptimistic's picture

It's just sad, all these analyses performed by people who do not have access to the HFT code.  What is the point?

It would be obviously a waste of time, but maybe it lets them look busy and keep their jobs.

Sun, 05/04/2014 - 17:46 | 4726646 TannyDanner
TannyDanner's picture

Every time I hear people say it doesn't matter because the fed will print/pump/save the markets no matter what, all I hear is "This time it's different". If the Fed truly had control of things then gold wouldn't be holding the majority of it's gains on a 13+ year bull market. Ultimately the market will do what it needs to do, all this manipulation is stricly short/mid term and more or less an illusion/ well disguised pump and dump. We just haven't gotten to the dump part, imo.

Sun, 05/04/2014 - 16:45 | 4726523 AdvancingTime
AdvancingTime's picture

While I think the economy is a piece of shit caution is advised. An unholy alliance of the Federal Reserve, the government, and the too big to fail has left those of us who question the validity of the recovery in a precarious position.

For the big boys, its insider information and computer trading, this includes computing patterns that exploit where stops are placed, this improves their ability to wash the timid and weak bears out of their positions in this manipulated market. More about this ugly state of afairs in the article below.

http://brucewilds.blogspot.com/2014/04/bears-have-little-reason-for-conf...

Sun, 05/04/2014 - 16:47 | 4726528 jmcadg
jmcadg's picture

Isn't that still the other side of the head? Surely a classic head and shoulders will be when the current move hits 4250. Then watch out.

Not that I know a damn thing about technical analysis especially in a manipulated market.

Sun, 05/04/2014 - 16:47 | 4726529 Herdee
Herdee's picture

I like what James Rickards explained when he said that the Fed knows that they have to let gold go up,it's just that they want it done in an orderly fashion.Gold always climbs during inflationary cycles.Isn't this what the Fed really wants?Yes,inflation.They've got to get the banks lending out the cheap fiat currency in order to generate tax revenue because the deficits at all levels of government are so huge.IMO, the first sign will be the 10% correction in the stock market and then the old idea of bringing back an Infrastructure Bank.The Fed has to pressure banks into redirecting money in different directions other than the stock market and war.

Sun, 05/04/2014 - 16:49 | 4726534 Devotional
Devotional's picture

Gold heading towards 1400 USD.

Sun, 05/04/2014 - 17:02 | 4726568 bam
bam's picture

if you are interested in structuring some option positions on gold: http://optiontronic.blogspot.ca/2014/04/gold-better-way-to-go-long-part-...

Sun, 05/04/2014 - 17:10 | 4726582 CrashisOptimistic
CrashisOptimistic's picture

Went back and checked the article.

No mention of gold in it.

It's not like ZH doesn't toss you plenty of gold clickbait that you have to spam other threads.  Can't you just scroll to the gold articles?

Sun, 05/04/2014 - 17:26 | 4726613 CHX
CHX's picture

Well, CO, your right, but the mention of Au is also warrented insofar that's where the capital will ultimately be parked, but then 1400 is off by probably ~1 order (or orders?) of magnitude.

Sun, 05/04/2014 - 22:14 | 4727225 fencejumper
fencejumper's picture

On what do you base your opinion?

Sun, 05/04/2014 - 22:16 | 4727229 christiangustafson
christiangustafson's picture

Metals sell off with stocks as margin calls go out.

Sun, 05/04/2014 - 16:56 | 4726547 orangegeek
orangegeek's picture

A head and shoulders needs a neckline - and when the neckline is broken, then it is a head and shoulders.

 

 

On the COMPQ - NASDAQ Composite, that's around 3850  or a about 250 points lower than Friday's close.

 

http://bullandbearmash.com/chart/nasdaq100-daily-turned-resistance-techn...

 

The NDX/COMPQ has already been hit hard - it's unlikely that it will recover and the next trend down should take us below March 2009

Sun, 05/04/2014 - 16:59 | 4726553 radwon
radwon's picture

T. A.?

In this "market"?

I don't think so. They will never let it happen.

 

 

Sun, 05/04/2014 - 17:03 | 4726554 q99x2
q99x2's picture

Is this a "U" or a "V" recovery? Is Greece going to default?

Will there be a war in Syria? Is Ukraine going to join the EU? Is Janet Yellen goin up my FAFSA. Bitchez

Sun, 05/04/2014 - 19:45 | 4726927 Emergency Ward
Emergency Ward's picture

"W"

Sun, 05/04/2014 - 17:00 | 4726559 Sudden Debt
Sudden Debt's picture

You forgot to mention that this trend needs to form in the next 4 to 6 weeks so shorting now is not so smart. Better wait 3 to 4 weeks, keep a close eye and indeed, if the new top fails to materialize go in short.

Sun, 05/04/2014 - 17:01 | 4726564 bam
bam's picture

wow, market must be moving because of the shape of a graph! DAMN IF ONLY I KNEW THAT BEFORE.

Sun, 05/04/2014 - 17:04 | 4726573 Sudden Debt
Sudden Debt's picture

The only right analyses are those made from last weeks performance.
And to be honest, if you do a tech. analyzes all you should now is that the result is a guide as to what won't happen for sure.

Sun, 05/04/2014 - 17:02 | 4726566 TammanyBrawl
TammanyBrawl's picture

Good analysis and, in this market environment, about as predictive as throwing darts at a board.

If the Fed starts getting results that they don't want (ie- a collapsing market creating a downturn in economic sentiment, and the subsequent knock-on effects that come with that), they'll just intervene. And if the intervention doesn't correct the problem, they'll intervene again. And if that makes the problems worse, they'll intervene again. The black swans are now planned.

This ends one of two ways. Either the Central Planners...excuse me Central Bankers keep the plates spinning long enough for the virtuous growth cycle to begin stabilising the system or they keep trying to adjust until it gets out of their power to manage and crashes. 

Sun, 05/04/2014 - 17:03 | 4726571 espirit
espirit's picture

Actually, this is some nice chart porn.

But when do technicals matter? 

Matrix Metrics.

Sun, 05/04/2014 - 17:13 | 4726586 Devotional
Devotional's picture

I could do with some head right now ... o_O

i had to ... sorry.

Sun, 05/04/2014 - 17:13 | 4726588 franzpick
franzpick's picture

NAZ is just one or two bad days of -3% away from breaking 5 month support at 4000, the US$ is only points from breaking 2.5 year support at 79.50, Putin's and NATO's armed forces are just feet away from a Ukraine clash.

Aside from that, everything looks A-O-K-Mighty-Fine... 

Sun, 05/04/2014 - 17:22 | 4726608 CHX
CHX's picture

Summary: If the market goes up, it does not go down, and vice versa.

Sun, 05/04/2014 - 21:33 | 4727140 Pareto
Pareto's picture

+1 fucking brilliant mate!! 

Sun, 05/04/2014 - 17:51 | 4726659 Goldilocks
Goldilocks's picture

Henry Mancini & His Orchestra-Moon River Cha Cha
http://www.youtube.com/watch?v=0fKRfgQdNUg (2:35)

Sun, 05/04/2014 - 17:54 | 4726670 I Write Code
I Write Code's picture

Make up your own Janet jokes here.

Sun, 05/04/2014 - 18:19 | 4726740 Kreditanstalt
Kreditanstalt's picture

So, the way these characters work is: you buy too high, sell when something is falling to limit your losses and BTFATH when it's rising?

That's "investing"?

Sun, 05/04/2014 - 18:19 | 4726741 buzzsaw99
buzzsaw99's picture

It's easy to overwhelm the senses with complex analysis...

uh, yeah, no shit, btfd, btfath, it's so easy a cave man could do it. complex analysis, raff out roud.

Sun, 05/04/2014 - 18:38 | 4726790 OC Sure
OC Sure's picture

There is nothing "classic" about that volume and therefore the complete picture is not a classic H&S. At least you knew to include the volume though... 

Sun, 05/04/2014 - 19:18 | 4726863 medium giraffe
medium giraffe's picture

Head and shoulders pattern possibly leading to a knees and toes formation over the coming months.  Look out for typical eyes/ears/mouth/nose setups on shorter timeframes for confirmation. 

Sun, 05/04/2014 - 20:17 | 4727002 g'kar
g'kar's picture

LOL

Sun, 05/04/2014 - 19:27 | 4726880 mblackman
mblackman's picture

Interesting pattern, yes but it still has to be confirmed with a decisive breach of neckline at 3995 on above average volume.  But the longterm trendline was broken in April which is bearish...

Sun, 05/04/2014 - 20:18 | 4727008 reallythinpancakes
reallythinpancakes's picture

A friend of mine in finance gave me this Bloomberg book that basically shows every chart pattern. In every instance of a pattern formation, there's a fairly definite direction in movement - unless of course, it does something else....in which case we will have to wait until it begins to form another pattern which will show why the previous pattern didn't quite play out - rinse spit repeat. Hey look, zoom in and you see a familiar pattern but don't zoom out because you might see something else LOL.

Sun, 05/04/2014 - 20:51 | 4727077 Spungo
Spungo's picture

Looks like a standard cock and balls pattern. It's one of my favorites patterns.

Sun, 05/04/2014 - 22:24 | 4727249 christiangustafson
christiangustafson's picture

Way too early to call that right shoulder on the Nasdaq -- but it certainly bears watching, along with the other indexes.

Best to beat the rush -- get your charts and crash scenarios out there while you can.  FWIW, here's mine.

The SPX is arguably drawing an ending-diagonal pattern.  When it completes, it gives us decent targets for the near- to mid-future.  

So we've got that going for us ... which is nice.

Sun, 05/04/2014 - 22:40 | 4727281 El Hosel
El Hosel's picture

 "The Market" has been topping ( apparently ) since December with the Dow finally the testing and failing its December high last week.... All the Downward ducks are in row right now,, that is for sure.  Bring on the most shorted stawks rocket ship tail spin.

Mon, 05/05/2014 - 00:48 | 4727471 Spungo
Spungo's picture

Since the current bubble is even bigger than last time, we should expect a drop bigger than last time. Start buying when it's down about 50-70% from here?

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