As we move to the middle of the week, it looks as though there are a couple different patterns that could be forming: a head and shoulders top and cup and handle bottom. The pattern you choose will most likely depend on your outlook on the market.
Let’s start off with the bears:
A possible top to the rally could be forming as we examine the head and shoulders pattern here.
A reason you might side with this pattern is because the right shoulder is forming lower than the left with is a bearish sign. Alternatively, you might not agree with this pattern because it is somewhat loose and the volume doesn’t match up where it should (at the tops).
Moving on to the cup pattern:
The cup and handle pattern is more likely the correct pattern the Dow is forming.
There are a couple things that can happen and will confirm this pattern. First, we could fall a little further on below average volume to continue the shakeout. We would want volume to pick up on any days that close off lows. Second, we want to see the indexes to start moving higher and eventually breaking out on high volume.
The good news is I will update you on whatever happens when we get some significant action happening. As for now, the market remains neutral and the best idea is to just hold long positions unless you are down 5-8% overall.
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