Some corrections are easier than others, especially when a chart pattern appears to confirm it. One of the most commonly discussed chart patterns is the Head and Shoulders pattern. Growing up in what I am now terming the “Golden Era” of the 1950s – 1970s, we all remember the shampoo commercials. Hence the title for this ditty. Do you remember the commercial with Farrah Fawcett and Penny Marshall? The time has passed so quickly.

Now, most chart patterns don’t seem to work these days. Or, possibly, most technicians never dug deep enough to understand them. The Head and Shoulders pattern tends to mark a peak in prices, and there is an upside-down one that marks a low. The magnitude of the peak or low requires context. The context on a Head and Shoulders pattern is a cycle peak or trough. Very few market mavens seem to understand this.

So when such a pattern appears when I am expecting a cycle peak or trough, I am a lot more confident that it is a pattern that will take, versus some random grouping of prices.

As you know, I have been expecting a market cycle peak for a few weeks. As I have also indicated, I did not think this peak would be the big Kahuna. Remember our diamond pattern of a few weeks back? I was confident it would mark a short-term peak as well. When the diamond pattern went up and not down, which is the least likely case, it hinted at the pattern that would ultimately form. The diamond pattern turned out to be a left shoulder in the larger pattern.

The Head and Shoulders pattern not only appears at and marks a potential peak, but it allows a projection as to where the market might bottom, at least short-term. You measure the distance from the top of the head to the neckline and then project the same distance from the ultimate neckline break. Yesterday, that projection and the Weekly Expected Move low were almost the same target – 3830 or so on the S&P 500 futures contract. And so, like a force of nature, the market did exactly what was expected, spiking low into the target, allowing us to enter right near the projected low. By the close, the market had traveled right back to the neckline. That was a $2,000 plus profit on a single S&P 500 futures contract.

This morning, we see a similar pattern potentially forming in reverse. If it completes, we know the next projection point. It would also confirm that the cycle low is in. I am not as confident in this diagnosis as yet. There is a wide time swath for this cycle bottom – all the way into Mid-March. The cycles have been tending to bottom early of late – but I will keep an open mind until we have further confirmation.

Also, these patterns can form the tops of a much larger Head and Shoulders pattern forming on a larger cycle. So, for all we know, this entire pattern is forming the left shoulder of a much larger Head and Shoulders pattern of the nominal 18-month cycle top, with the next run-up forming the final peak. Let’s hope it is that easy, as it will help us project that cycle low with some accuracy. I doubt it will be that easy, but one can hope.