Update 12/17/07

The Chaiken Money Flow can be used to assess volume which is a critical component of any chart pattern.  It’s not enough to simply see the shape of a pattern in the price, the underlying technical requirements have to support the pattern as well, if it is valid.  For a head and shoulder’s pattern to develop, we should se more volume leading into the left shoulder then into the head and we should see volume increase substantially coming off the right shoulder beyond what is coming off the head.  We have seen most of this and in order to complete the pattern, we need to see the price push below the neckline at 1410 on high volume.

Even if a Head and Shoulder’s pattern does form, this does not necessarily mean that we will get a market reversal.  Alan Greenspan gave his famous “irrational exuberance” speech in 1996 and yet the market continued to climb.  Over an eighteen month period starting in 1999 through 2000 the market formed two head and shoulder patterns followed by a double top, before finally tanking.

The RSI, MACD and Slow Stochastic are now clearly showing a deteriorating pattern and a move to the bottom of the five year channel seems likely.   There is no guarantee the market will bounce off that support, despite the seasonality.  There are some intermediate weaker support levels which could slow the deterioration of the current situation.  I wouldn’t be surprised to see the market bottom going into Christmas day and have a window dressing rally heading into the New Year.

After the October FOMC meeting, we saw the action of the next couple weeks dominated in the closing hour.  The “correction” in the last correction occurred almost entirely in the closing hour each day and often reversed the day’s trend.   This was very frustrating for us due to our noon cutoff deadline.  I expect we will see the same type of activity over the next couple of weeks.  In the last hour on Friday, the market closed slightly below 1470, which had been a critical intraday support for three days.