Thursday, January 21, 2016

JC Parets on the H&S pattern


Well, he is a TA after all, so let's see what he has to say:

JC Parets - about that H&S pattern in the S&P 500. Quote:

The Head and Shoulders experts are popping up everywhere these days.

OK, let's stop there and let that sink in.

Every single clown on the internet is looking at the same H&S pattern right now.

Good? OK, let's go on:

Never has there been a price pattern searched for or imagined in people’s minds more than the infamous Head & Shoulders Pattern. Funny, as much as they love to talk about it and as much airtime as it gets on the TV and Internets, it’s actually one of the more rare patterns driven by supply and demand. The reason it is so rare is because, by definition, it is a reversal pattern. Since markets trend, and ongoing trends tend to continue trending in their direction, by looking for a Head and Shoulders Pattern, you are doing the exact opposite of what we’re trying to do here in the first place: recognize trends.

Again, good point. Especially when someone's thinking the target of this H&S is 1600, what they're essentially doing is saying the secular uptrend in equities is going to end.

Secular equity trends don't change unless the economy changes, by the way.

Back to JC:

Currently, we are seeing such a pattern developing in the S&P500 Index. With a Left Shoulder in 2014, the Head throughout the Spring and Summer last year, and now a Right Shoulder in Q4, we have a Neckline near the 1860-1870 area. The S&P trading below that level, and only below that, would confirm that this is indeed, the rare structural topping pattern known as Head & Shoulders.

Totally cool, no disagreement from me. And I guess he'd agree this is a valid H&S brewing, because the right shoulder is deformed with higher volume. Looks perfectly good. That's totally a textbook head & shoulders.

And we know this because you, me, and every other clown on the internet has by now seen loads of previous H&S calls that didn't work out, and only afterwards did we find out that an H&S requires high volume on the right side and deformation because of fast price movement.

So now we all ignore the idiot with a blog somewhere who calls an H&S top based on an incorrect understanding of what counts as an H&S pattern. But this is a textbook H&S we're seeing now, so suddenly the idiot with a blog somewhere can point to a textbook pattern and so this time we believe him.

But here's the money shot:

The measured move target based on a completion of a Head and Shoulders Top is the distance between the top of the Head and the Neckline, subtracted from the Neckline. Our math gives us about 1870 minus 270, which would take us down under 1600 in the S&P500. This has been a target of mine for months, so it’s nothing too exciting from our standpoint. It really just confirmation of everything we’re seeing elsewhere.

I still think this is a sell any strength market environment. Any breaks of a neckline this week, or next, would likely lead to another 14-15% of downside for this market. I don’t think it’s anything irregular and would really just be a nice correction after a monster rally in the market since 2009. Think about it: A 25% correction in prices after a 220% rally in 6 years? Seems pretty reasonable, if you ask me.

Know what, JC? I think the entire market agrees with you right now! Absolutely! What's so terrible about a 25% correction from a 220% monster rally? You're supposed to see corrections, after all!

In fact, people spent all of 2014-2015 asking when the heck the 20% mid-cycle correction was going to come, JC!

They don't feel the August-September 2011 Eurodoom was a correction, because it was only 19.4% on the S&P 500.

The Gary Wordsalad June 2013 bottom-tick, which was supposed to usher in a massive repudiation of debt as a dishonest system came apart at the seams? A paltry 6%.

And remember the Ebola epidemic of October 2014, where millions of Americans were dying? That was just a pitiful 7.7% correction!

And the August 2015 flash crash, when the market went no-bid and QQQ was trading at a 15% discount to the NASDAQ index, also wasn't a good enough correction. That was only 12.3% on SPY.

They want more. Whitey wants a man's correction!

And now they see the H&S pattern, and they're thinking exactly what you're thinking:

We’ve been leaning on the short side for months now and would look to sell into strength, especially towards 1980, if we get up there. Also, I would definitely be aggressively adding to short positions if the S&P500 is below its Neckline. I think the levels are clean and this is a pretty simple setup.

And I betcha everyone else wants to do that too. That is the strategy of every single coke-snorting egomaniacal White-ass honky on Wall Street.

And the dummies and morons want to do this because they want to short the market to 0 as their long-awaited hypermageddon wipes out all worldwide wealth, while the smarter guys want to do that to make a bit of money before going long for the next 5-year upleg in the market.

Know what, JC?

That sounds like there's one heck of a crowded trade based on the H&S pattern.

I don't think you're going to get much of a neckline break.

Why? Well, if people are happy to puke Ford down to a 4% dividend yield with auto sales at an all-time high and gasoline prices plummeting, while the UST30Y is trading at under 2% yield, then there's not much lower that this market can go from a valuation perspective - barring a worldwide recession which hasn't been happening.

It's also silly to sell a monster monopolist like General Electric and go to cash or bonds when GE has a 3% yield, is finally cashing up by selling its noncore assets, and (trust me, I know electrical) it's still going to be the world-dominating source of all lighting products for the next 100 years.

I see the above, and I'm suddenly itching to go long the US equities again.

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