The previous post looked at the possible formation of a bear flag on the NASDAQ Composite daily chart. It implied a decline that retraced 50% of the previous March/September rally range. Another bearish reversal formation is under construction and near completion on the Dow Jones Industrial Average chart. A classic head and shoulders pattern has developed over the last two months.
As the Dow chart clearly illustrates the August high formed the right shoulder, the head is the September high, and this week’s lower high may be the right shoulder. Neckline support is located at the 27500 level. This is an important support level because it intersects with the horizontal support line drawn off the June high, a three month uptrend line, and the 50 day moving average. If this nexus of support were to breakdown the head and shoulders pattern projects another approximate 6% decline from current levels. This would revert the average back just below its 200 day moving average.
A break below the neckline 50 day average would be a major technical moment. If accompanied by the NASDAQ taking out its key 10750 level the outlook for the broad market would be clearly negative. In both cases, however, confirmation is required just like any technical price pattern.