Head and Shoulders Pattern Plus Candlesticks Equals Stock Market Decline

I haven't yet seen any comment on it, but there it is: a Head and Shoulders Top in the Dow Industrials Average. The Daily chart of the Dow shows a clearly identifiable Left Shoulder on July 23, 2008; a Head on August 11, and a Right Shoulder on September 2. The Neckline is drawn on a line extending from the low of July 28 to the low of September 5. Our understanding of the pattern - a so-called "western" pattern - is amplified by our knowledge of Japanese Candlestick patterns and, in particular, by the "Evening Star" on July 24, the "Bearish Engulfing" on August 12, and the "Belt Hold" on September 9.

So, what do we make of all of this? The answer is, the Head and Shoulders Top is generally a reliable predictor of a price decline. This one needs confirmation by a decline below the neckline and then a re-test of the neckline and a further decline thereafter. The bearish Candlestick formations add to the mix.

We measure the decline which is expected to be generated by the Head and Shoulders Pattern by measuring a vertical line drawn from the top of the Head down to the neckline, and then taking that measurement and projecting it downward from the neckline.

In this case, we calculate a distance of about 767 points on the Dow from the top of the Head at 11867 to the neckline at about 11,100. Projecting 767 points downward from the neckline gives us 10,333 (11,100 minus 767 = 10,333). That's 897 points below 11,230, which was the closing price of the Dow on September 9, 2008 - and is a price level which was last seen in October 2005.

So, if prices continue to decline after September 9, 2008 and if the neckline is re-tested and proves to be insurmountable resistance, in due time we should expect to see Dow prices back to where they were three years ago - and also where they were in April 1999!

Automatic Blood Pressure Monitor mesothelioma doctors