Head and Shoulders Live Data Exercise

In my first post here, I described the “head and shoulders” pattern as a simple arc obscured by some oscillation.  This week, Twitter is starting to see the pattern in major indexes, so I thought I would do the exercise again with current data.  The chart below plots the S&P 500 fitted with a parabola.

ChartNo one ever said the indexes track geometric figures.  This is just a quick way to fit a curve and … look at that regression coefficient!  The timeframe is 2013, year to date.  I used integers instead of dates, to make the formula simpler.

You can see that the oscillation has a period of 36 or so, with an increasing amplitude.   Adding a sine wave to the parabola fits the data with a correlation of 97%.

CurvesAdmittedly, this is an exercise in curve fitting.  The point is, if the people calling “top” on Twitter this week are proved right, it’s because this is what they are seeing.

As for trading, be aware that the hypothetical parabola is only now peaking, and the oscillation is on an upswing.  You would need to see a break of 1650 or, more conventionally, the August low of 1628.  Any close over 1710 would invalidate the pattern, and the oscillation could reach that level at its late September peak.

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