You will not be able to escape the headlines and apparent exhortations this morning of the Dow Jones industrial Average printing new, all-time highs. The now-infamous “megaphone” chart pattern many technicians had observed on the Dow several weeks back forced you to consider just how rigorous you needed to be in terms of extrapolating the implications and probabilities of the potentially bearish pattern.
While some traders may argue that the indices do not matter much these days, that mindset is misguided in that it neglects to acknowledge the information which can be obtained from a chart pattern–Especially one that fails.
In other words, from failed moves in one direction often come aggressive moves in the other. The information we can glean from a widely-watched and widely-antcipated-as-bearish megaphone pattern may very well hinge on the bulls holding 1525 neckline on the S&P 500’s inverse head and shoulders pattern we looked at last Friday. But the possibility of an explosive move higher from here, with the chase essentially being on for bears and out of position bulls, needs to be considered in light of the megaphone pattern’s laughable failure to resolve lower.
Here is a brief excerpt of my Weekly Strategy Session from this past weekend.
The increasingly popular analysis amongst many market players and pundits now seems to be that the broadening, or “megaphone,” channel pattern on the Dow Jones Industrial Average and other indices is a clear warning sign of an imminent major market top. To get right to the point–A broadening channel on a major index after a prior uptrend is not a guarantee of a top, or anything close to it, particularly without adequate evidence of necessary downside price confirmation. Over the years, I have detailed various megaphone formations, some of which proved to be wildly bearish, namely the April 2010 megaphone on the S&P 500 Index which led to the May 2010 “Flash Crash.”
However, those patterns do not, in fact, always resolve lower. (The megaphone is considered a potentially bearish setup after a prior uptrend due to the increasingly loud argument [more dramatic price swings, uptick in sell volume, etc.] between bulls and bears, which tends to favor a bearish resolution in this context, as opposed to the more traditionally-bullish quiet, mild indecision). In addition, also consider that the Dow is not far from all-time highs of 14,198, set back at the October 2007 market top. As a general rule of thumb, if a widely-watched index comes within close proximity to a massively important price level, there tends to be at least one touch of it, if not an initial overshoot.
