If you do a search using Bing.com or google.com for “Head and Shoulders Bottom September 2009″, you will see a growing list of websites identifying this formation in the major indecies. Unfortunatley, most of those who have done so have missed the key element in verifying a Head and Shoulders Bottom, and that is volume! Take few moments to watch this video and you’ll see why I believe we haven’t formed a head and shoulders bottom (yet), and what market action would need to happen in order for this formation to be validated (highly unlikely).
To recap the video, volume expansion is critical during the formation of the right shoulder and a spike in volume is necessary on the breakout. Without the corresponding volume action, the head and shoulders formation can not be validated and thus is unreliable. Also, with regards to the specific formation on the DOW and S&P 500, the right shoulder is extremely shallow, which can be ok, but combined with the lack of volume follow through really negates the predictive capability of a true H&S bottom formation.
There is also some bearish divergence forming on the dialy chart between price and the MACD. of course, the daily chart reflects short term trends, but any kind of significant pullback would invalidate the breakout that occurred in the middle of July.
However, as a I said there is on possiblity left for hte market to validate this formation, and that would be the support level at 9,000 would be tested, and once it held, a huge up day combined with a volume spike would confirm the H&S bottom pattern, and set a target of 11,500 on the dow.
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