Market Signaling Is Mixed – Head And Shoulder Pattern Could Get Tricky

I might be over thinking the situation here, but I have reason to believe the head-and-shoulders pattern that EVERYONE is watching won't materialize as the bears are hoping. This wouldn't be the first time an overly popularized pattern fails to act as it "should". This does not mean that the pattern won't come to fruition, I just think that the formation will end with less than ideal symmetry.

Don't get me wrong, I am indeed bearish heading into the 2nd half of the year, and very much so! However, I have my doubts as to whether the past four days of selling is the kick-off to the next leg lower. The volume didn't spike and the breadth was not as dismal as I would like to see if indeed we were starting leg #2. 

Furthermore, one of my favorite indicators for timing intermediate term turning points is just coming out of oversold territory. Even during the 2007-2009 downdraft the market never rolled over with real meaning while this indicator was at its current depressed levels. The "Intermediate-Term Indicator Score" created by Sentimentrader, as evidenced by the graph below, has proven to be a very reliable tool for market timing.

The Euro, global equities, and commodities haven't experienced any real significant selling pressure. In fact, the EURUSD has been positive the past two days.

What this all means to me, is that the market is likely to continue to gyrate for the foreseeable future. Today we closed on the bottom side of a possible upward channel. An ideal scenario to take place in coming weeks would be to see a channel form while all oversold conditions are completely removed from the market. Then at some point, possibly in July, the market breaks the channel with all assets declining in harmony. May or may not happen in this exact manner, it could be some other variation of this scenario…..only time will tell.

One could even make the argument that an inverted head-and-shoulders pattern is taking shape and the market will soon attempt another rally. It is most clearly visible in the Russell 2k.

 

The fundamental landscape is shaping up for another signficant decline – now its just a question of getting a more clear picture of the technicals and timing. Very shortly, I will be publishing my thesis for H2 2010 and beyond. Inside, I will examine the fundamental, technical, and sentiment aspects of the global marketplace and what I beleive it means going forward.