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http://www.murphymorris.com/affiliate/market_watch.html
John Murphy's Market Watch
by Mr. John Murphy, President of MURPHYMORRIS.COM
Sat, July 13, 2002 - HEAD AND SHOULDERS TOP?
WHAT IS IT?... Quoting from the Glossary in my book Technical Analysis of the
Financial Markets: "A head and shoulders top is the best known of the reversal
patterns. At a market top, three prominent peaks are formed with the middle
peak (or head) slightly higher than the other two peaks (shoulders). When the
trendline (neckline) connecting the two intervening troughs is broken, the
pattern is complete." While most major averages show a similar pattern, we're
using the NYSE Composite Index for illustration purposes because we believe it
probably gives the best overall measure of the state of the "market". There's
no question that the chart has the look of a "head and shoulders" top. The two
"shoulders" were formed during 1998 and 2002. The "head" formed during 2000.
The "neckline" is drawn under the 1998-2001 reaction lows. As of Friday's
close, the neckline is already been pierced on the downside, but not by much.
There are two other support levels that bear watching. The first is the
intra-day low hit last fall (which is at 494). The second (and more important)
is the late 1998 low at 463. Friday's close was only a shade below last
September's low, but not by enough to call this a clear breakdown -- at least
not yet. Regarding the breaking of the "neckline", there's also a 3% rule which
comes into play at major chart points. That means that the neckline needs to be
broken by at least 3% before we can call it a "major" breakdown. We may get
there (about 485), but we're not there yet. Unless the market attempts a rally
soon, however, a breakdown could be imminent, which could carry the market
lower into the September/October period.
[...]
THE MARKET ISN'T CHEAP... The purpose of looking at the long-term charts isn't
to scare anyone. Our main goal is to show that this market isn't cheap. In
fact, it's still historically very high. We've expressed the view several times
before that we believe the twenty-year bull cycle has ended. That means the
current bear market could last longer -- and fall much further -- than most
people realize. We don't know how low it can go. It's the direction that
matters most -- not the actual numbers. The "head and shoulders" tops shown in
the preceding charts is another warning that things could still get a lot
worse. As the message is finally getting across to the public that this bear
market is indeed different from those in the recent past, mutual fund
redemptions are starting. Imagine what could happen when the public finally
decides to start selling.
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