Sunday, July 19, 2009

When do we throw the ol' H&S under the bus?

I wrote this in response a blog question on another blog, in response to "when would practitioners consider the H&S officially dead". To clarify...I am not suggesting to go out and get crazy short, just that that rally was contrived and there may not be widespread support behind it.

I don't think we can throw this under the bus quite yet. Normally if the price closes 5% below the neck and THEN retraces significantly above the would be for the most part busted, however even then patterns retrace and then "perform" by dropping significantly below the neckline. In some rare cases the retrace goes above the right shoulder and even above the head and yet returns down for a significant move down below the neckline. Less than 1% so lets be realistic.

However, my take is that this complex head and shoulders wants to have more symmetry than a normal head and shoulder, they are likely to have more symmetry, and therefore having just on shoulder on the right side would be unusual. What I am proposing is that the neckline was never officially broken and this is just another shoulder.

I was watching futures action and it was blatantly obvious that huge amounts of futures were being purchased at strategic time to goose the market, thus adding the short covering fuel to the fire. This was especially true to achieve the first close above 900.

I guess that "success" could breed upon success and this market manipulation could result in a long term uptrend based upon increased confidence, based upon manipulation. But I think there is a good chance it will fail. Put holders were crushed during expiry week, if they had July puts. That itself was a major victory for the market makers. Would it make sense they were willing to commit several 10's of billion to pump the entire market by pumping the indices and a few high flyers, while selling July puts and selling August calls. Time will tell.

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Insightful and Useful Comment!