According to stockcharts.com:
The Head and Shoulders bottom is referred to sometimes as an Inverse Head and Shoulders. The pattern shares many common characteristics with its comparable partner, but relies more heavily on volume patterns for confirmation.
As a major reversal pattern, the Head and Shoulders Bottom forms after a downtrend, and its completion marks a change in trend. The pattern contains three successive troughs with the middle trough (head) being the deepest and the two outside troughs (shoulders) being shallower. Ideally, the two shoulders would be equal in height and width. The reaction highs in the middle of the pattern can be connected to form resistance, or a neckline.
According to the Encyclopedia of Chart Patterns by Thomas Bulkowski, who did extensive back testing of chart patterns about 10 years ago, the average rise is 38%, throwbacks happen 52% of the time, and it hits its price target 83% of the time.
A 38% rise off the bottom would put you at 930 on the S&P 500 – which we’ve clearly overshot. But if you measure from the neckline of 930, you will have a price target of 1,184. The next resistance was set in September 2008 at 1,156, which would be a 15.6% gain from here.
The secondary question is: Will we have that throwback to 930-950 on the S&P 500 before going up again?
There are folks over at Bloomberg who seem to think so, now that the P/E ratio on the index is 17:
The S&P 500 yesterday reached its highest level since President Obama was elected Nov. 4 on speculation the recession is ending after gauges of manufacturing and construction spending in the U.S. topped forecasts and China’s factory output expanded.
The index’s valuation rose to about 17.4 times its company’s earnings over the past 12 months, the highest since September. Since reaching a 12-year low of 676.53 on March 9, the S&P 500 has climbed 48 percent.
It’s a coin flip; I’d suggest you buy half now and half if you get a dip. Right now the S&P 500 November 1,100 calls are going for $12.99 with a chance to make about 92% (if you’re right) with three weeks to spare. It doesn’t seem worth the risk, but if that option price is cut in half on a pullback... Then I’d be all over it.
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