Fear Driving ‘Head And Shoulders’ Pattern?


Simpler Trading Team

3 min read

If this wild economy had a social media profile, its relationship status with the chop-and-slop market would be “it’s complicated.”

Jobless reports, inflation, and statements from the Federal Reserve have affected the market, particularly bond prices. The consumer price index reading of 7.5% last week pushed bonds to the downside – meaning stocks and bonds are moving together in an unusual fashion.

Mixed with economic events, this tandem movement may not be in the best interest of traders. The potential for war in the Ukraine, uncertainty (even panic) in the market, and trucker protest convoys have Simpler traders pondering if this market is bullish or bearish? Maybe both?

Determining market direction can be difficult with so much uncertainty in the market and chatter in the background from the news.

What are big trading institutions up to?

This environment does give rise to important questions, “What are the big trading institutions doing? Are they loading up on the stocks or are they dumping them?”

Certainly, retail traders (individuals trading for themselves) feel the brunt of the decisions of institutional traders that often represent retirement accounts and large investment firms.

Head and shoulders pattern reveals direction?

Simpler’s traders are watching a head and shoulders pattern play out in the S&P 500. Our traders see any rally forming as merely the shoulder of the “mother of all head and shoulders” on the weekly chart. This pattern could indicate that movement to the downside isn’t over.

Simpler’s traders are seeing this technical analysis pattern of head and shoulders as showing a baseline with three peaks and depicting a bullish-to-bearish trend reversal. They are watching this pattern across all time frames for confirmation.

Watching sectors, ‘darlings,’ gold for patterns

Sector rotation is also playing out in the market, as traders and investors alike seek havens for cash positions. Once Simpler’s traders observe this market has stabilized, it still could be quite some time before the market reaches any new all-time highs.

Our traders are also aware of how money in the market is flowing from technology stocks to energy and financials – although those stocks have yet to gain any significant strength.

Social media and online streaming services, darling stocks of the Nasdaq, appear to be waning heavily and traders might expect those stocks to trade sideways in this rotation.

Also, talks of war have caused interest in gold to increase. Once every three to five years, a monthly squeeze occurs in gold – and Simpler’s traders are watching carefully for this possible setup.

Stepping lightly, our traders understand that this isn’t the time to trade just to force a trade. Sometimes the right move for Simpler’s traders is to keep what they have and wait for the next solid play.


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