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On Thursday of last week I showed you a daily chart of the S&P 500:
 Click on image to enlarge!
And I said:
1) It remains above its 50-day moving average.
2) The recent consolidation has helped it move off of overbought levels.
3) The triangle pattern suggests prices will exit in the same direction that they entered – in this case, up. Fibonacci projection levels suggest a move to 1400 could be in the cards if the S&P 500 breaks to the upside.
Those bullish guesses aside, one has to be concerned about this pattern shaping up over the longer-term in a chart of the S&P 500 Index Weekly—Mr. Head and Shoulders:
 Click on image to enlarge!
The rest of this week is big – and its outcome may determine whether the above head-and-shoulders pattern begins to influence price action. Here is an updated daily chart showing a break below two key support levels:
 Click on image to enlarge!
Not only did the S&P 500 break out of that triangle (to the downside!) last Thursday, but it has now broken below the 50-day moving average and below 1200 (on the futures chart). Futures are indicating a higher open today; but the sell-off yesterday was awfully sharp, suggesting a downside bias.
It is likely going to get quiet soon, with the Thanksgiving Day holiday in the US this Thursday. This probably means we see the S&P bounce around current levels ... unless of course the brilliant minds in the eurozone try to sneak some type of agreement or disappointment through thin markets.
But back to the head-and-shoulders pattern ...
One reader wrote back to me on Thursday in response to Currency Currents. Among his comments was the statement that head-and-shoulders patterns only play out 50% of the time.
I responded with this:
We can be wrong more often than we are right and still make money in the markets if we are disciplined with our risk. That said: a 50% chance of winning by playing a head and shoulders looks pretty good! Though we’re not necessarily going to play it for the sake of it being a head and shoulders – just thought it was worth mentioning and factoring in to the entire picture.
Indeed. I have known head-and-shoulders patterns to not play out according to forecast. But it can certainly validate one’s fundamental view. Let me point out a few recent head-and-shoulders patterns, on the S&P 500, that have worked ...
Weekly, February 2011 – August 2011:
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Weekly, July 2007 – November 2008
 Click on image to enlarge!
Again – these head-and-shoulders came at extremes and coincided with major sentiment shifts.
Each of these examples is relatively short-term for investors seeking a long time horizon with their investments. Anyone on CNBC will tell you that stocks are a good buy if you plan to hold on for a year or more. But there’s a growing chance those cheerleaders are going to be extremely wrong.
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