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Flip a coin

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6/15/12

Stocks rallied and the Dow put in another triple digit move, this one to the tune of +156.

Daily TSP Funds Return
G-Fund: +0.004%
F-fund: - 0.04%
C-fund: +1.08%
S-fund: +0.98%
I-fund: +0.44%
Greece is still center stage as they have an important election on Sunday. The concern is if anti-austerity political parties in Greece will win enough seats in parliament to derail the bailout program, so expect some nervous trading on Friday, and fireworks on Monday.

I have been looking at past inverted head and shoulders patterns (H&S) on the S&P 500 trying to figure out which way this one will break. Going back to 2006, I concluded that we may need to flip a coin.


Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

Take a look at some of the more prominent inverted H&S patterns we saw in the last several years:

In late 2011 we saw an inverted H&S (let's just shorten that to IH&S). The market was coming off of a low and the IH&S pulled back to test the head before finally breaking to the upside.


Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

In early 2011 the market was rallying into an IH&S. It broke to the upside, but failed a few days later.

In mid-2010 we saw a large IH&S form after a pullback. Similar to the late 2011 IH&S, it tested the head before rallying higher.


Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

In early 2010 an IH&S formed after a pullback and it broke to the upside without a test of the head, and the rally was pretty significant.

In 2007 we saw an IH&S form a low after a pullback and it broke to the upside without testing the head first.


Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

In 2006 there was another pullback, an IH&S, a test of the head, and a rally.


Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

So there is no clear consensus here but the IH&S after a pullback seems to test the head often enough to consider it a good possibility. The historical intermediate-term action seems to indicate a rally is coming this summer. The question is whether we see a test of the head first, which in the current situation would be a pullback near the 1290 area min the S&P 500.

Thanks for reading! Have a great weekend!

Tom Crowley


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