V. 21:13 (41-44): Working Money: The Critical Head & Shoulders Test by Matt Blackman

V. 21:13 (41-44): Working Money: The Critical Head & Shoulders Test by Matt Blackman
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Working Money: The Critical Head & Shoulders Test by Matt Blackman

One of the most reliable chart patterns is the venerable head and shoulders. The markets are set to put this technical mainstay to the test once more. If it passes, the bears will roar. If it fails, get ready for a stampede of the bulls. Either way, is it something you can afford to ignore?

As rallies go, the latest [October–November 2002] has been most interesting, if only because it has attracted the loudest calls of a bottom from market professionals. But it is the sixth rally since the current bear market officially began in March 2000, and each has been called “the” bottom by a fair share of experts. With all the talk of a turning point, few appear to have noticed that markets are at a pivotal juncture. Even fewer seem to be aware that a number of major indexes are giving the same signals at similar relative resistance levels, which will test the resolve of the current rally. Like Punxsutawney Phil on Groundhog Day, the markets’ reactions to this event will provide valuable insight into whether there will be six more years of bearish winter or if spring and the bulls are just around the corner.


The markets have been in a downtrend since mid- to late 2000. Much has been written about how to identify trends, but if you are unsure, the best way to see them is to ask an eight year-old. Put a chart in front of a youngster and ask him or her which way the stock is heading. They get it right every time. So if identifying a trend is so easy, why do so many investors continue to go long in a downtrend? Maybe they don’t know any children. It’s also amazing how many experts on financial programs don’t seem to know any second graders, because they continue to advise averaging down or trying to pick a bottom in equities that are obviously headed for the basement.

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