Unmasking The VooDoo - Head-And-Shoulders

Whenever I think about the famous - or infamous - head-and-shoulders pattern from the world of chart reading I always seem to go back to the late, great Mark Haines of CNBC who in the summer of 2009 asked every guest, whether they were a technical analyst or not, if they were worried about the head-and-shoulders pattern that formed in the market. I cannot remember if he was looking at the Dow or the Spoos but that is far too picky for this episode.

Anyway, what he saw was this:

I sure looked like a head-and-shoulders, which as "everyone knows" is a reversal pattern. Keep in mind the environment we were in at the time. The Internet bubble popped and the raging bear market was only three or so months in the rear-view mirror. That is, for the few who recognized that it was actually over.

Haines and countless others were still in panic mode and in extremely skeptical of any rebound. Therefore, a possible reversal pattern was looming to squash investors one more time.

I also have to give Mark credit for recognizing the pattern with it variation of a left shoulder but we'll get more into the details of the pattern a little later.

Anyway, let's see what happened after the gentlemanly freak out on television:

Oh snap! What the heck happened? The world's most recognized pattern (by non technical analysts) failed to end the rebound. And the market went up - a lot. And fast. Hokey Smokes! (Think Rocket J. Squirrel).

Let's dig into the deets, starting with what exactly a head-and-shoulders (H/S) is supposed to be.

While the pattern works in bull and bear trends, albeit it must be upside down for the latter, let's stick to everyone's favorite - the rising trend.  

As we know, as trends trend they usually exhibit a bit of ebb and flow. Advance and pullback. Three steps forward and one step back.You get the picture. It is good when each push up makes a higher high and each fall back makes a higher low.  

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Disclosure: No positions in anything covered.

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