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Technically Speaking: Topping Patterns Popping Up Everywhere


  • With the Nasdaq index more oversold than the S&P 500, I suspect we will see a rally shortly in these stocks, which we will use as a "selling" opportunity to reduce exposure.
  • Both international and emerging markets are well ahead of any expected growth in the U.S. economy, so the risk of disappointment is high.
  • With valuations high, the bullish rationalization why prices can go higher is a bet on explosive economic growth, a falling dollar, low-interest rates, and a consumer spending surge, all while inflation remains muted.
  • In our view, the two key issues that have the most significant potential to undermine market confidence remain the dollar and rates.
  • The dollar has started building higher bottoms and is currently triggering buy signals suggesting there may be more to this rally.

As I worked through this past weekend's newsletter, I noticed that multiple markets are starting to exhibit topping patterns. It will be crucial for markets to reverse these patterns in the short-term if the bullish advance continues.

As we discussed with our RIAPRO.NET subscribers yesterday:

"The good news is that the S&P 500 held its 50-dma during its recent selloff. With the market getting back to more oversold levels, we are likely to see a counter-trend rally for a few days that could get us back above the 20-dma. It will be necessary for the rally to set new highs to negate the "head and shoulders" pattern. If the market rallies, fails, and breaks the neckline, we could well see a deeper correction ensue."

There is an important caveat to this analysis.

The start of "head and shoulder" patterns occurs with quite some regularity during an advancing market. However, they are quite often not completed as the market moves to new highs negating the pattern. Therefore, while we are pointing this pattern out, we are not saying the market is about to go lower. Such will only be if the pattern completes with a break of the "neckline" support.

However, it is important not to dismiss this pattern entirely as it often preceded more substantial declines, as we saw in March of 2020.

Notably, we see this pattern elsewhere.

Same Pattern Popping up Everywhere

Nasdaq Index

The "head and shoulder" pattern is defined better in the Nasdaq. Currently, the neckline support needs to hold, or we will see a more significant correction in the technology sector. With the index more oversold than the S&P 500, I suspect we will see a rally shortly in these stocks, which we will use as a "selling" opportunity to reduce exposure.

Emerging Markets


This article was written by

Lance Roberts profile picture
Unique, unbiased and contrarian real investment advice

After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; I have pretty much "been there and done that" at one point or another. I am currently a partner at RIA Advisors in Houston, Texas.

The majority of my time is spent analyzing, researching and writing commentary about investing, investor psychology and macro-views of the markets and the economy. My thoughts are not generally mainstream and are often contrarian in nature but I try an use a common sense approach, clear explanations and my “real world” experience in the process.

I am a managing partner of RIA Pro, a weekly subscriber based-newsletter that is distributed to individual and professional investors nationwide. The newsletter covers economic, political and market topics as they relate to your money and life.

I also write a daily blog which is read by thousands nationwide from individuals to professionals at www.realinvestmentadvice.com.

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