With the market getting crushed, there’s been a lot of chatter about the stock conforming to a “head-and-shoulders” behaviour model.
This is simply a typical stock market trading pattern that looks a lot like, well, a head and shoulders.
For a little more on that, EWI’s Robert Prechter explains:
“[Left shoulder:] A strong rally, climaxing a more or less extensive advance, on which trading volume becomes very heavy, followed by a minor recession on which volume runs considerably less than it did during the days of rise and at the top.
“[Head:] Another high volume advance which reaches a higher level than the top of the left shoulder and then another reaction on less volume which takes prices down to somewhere near the bottom level of the preceding recession, somewhat lower perhaps or somewhat higher…. Roughly estimated, about one third [of them] show more volume on the left shoulder than on the head, another third shows about equal volume, and the final third show greater volume on the head than on the left shoulder.
“[Right shoulder:] A third rally, but this time on decidedly less volume than accompanied the formation of either the left shoulder or the head, which fails to reach the height of the head….
Some analysts are arguing that the markets are beginning to look like this right now, though their idea appears to be a significant adaptation of the textbook head-and-shoulders definition. While these behaviour models are interesting, it’s always wise to take them with a grain of salt.
Photo: Option Radar on Flickr
Make it what you will.
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