TigerSoft News Service   5/9/2010     www.tigersoft.com 
              NON-PUBLIC RESEARCH - All rights strictly reserved.    (C) 2010 www.tigersoft.com   Wm. Schmidt, Ph.D.

       Peerless Needs to Judge Head & Shoulders Pattern Completions

             Head and Shoulders Patterns Predict The Unpredictable!

  Bearish Unexpected Events Are Often Marked by Head and Shoulders Patterns

                                                

                                CALLING ALL TOPS

          Completed Head and Shoulders Tops Must Be Treated As Judged Peerless Sells

                        

                 Instead of the usual Peerless Sell, our tip-offs of a top this past week were
       abundant numbers of head and shoulder tops and a Tiger Professional Closing Power
       that was zig-zagging lower after an extended, long advance.  The Closing Power is the
       cumulative blue indicator just beneath the price chart.    In the chart below for the
       QQQQ, you can see how well trend changes of TIgerSoft's CLosing Power work
       as Buys and Sells.  The break in the CLosing Power's uptrend served as an
       excellent Sell on 4/30/2010.  If there was any doubt about the market's trend, the
       completion of the head and shoulders pattern should have removed it.  In these
       circumstances, we try to estimate how far down the market will go, but this is
       only an estimate.  The decline we estimated was 5%,  So far, we have seen a 10%
       decline.  Because, such guesses can be so wrong, we have consistently said that
       it is best to just wait for the Closing Power   downtrend to end.  Historically, waiting
       for the NYSE A/D Line downtrend also to be broken before buying makes traing safer.

                For Peerless, the presence of a head and shoulders top cannot easily be
       programmed.  We have to recognize it by sight and experience.  There have been lots
       of them in the DJIA alone since 1915 to study.   We have discussed these at some length
       in earlier studies. 

               A closing price that clearly drops below the neckline is the Sell.  The neckline need
        not be flat and the pattern need not be perfectly symetrical.  You should be able to see
        a left shoulder, a head and a right shoulder whose formation first requires a deeper
        decline to form a neckline low and then a low volume rally that gives way to a decline
        that clearly penetrates the neckline on a closing basis.   The neckline then becomes
        resistance if the pattern is valid.  For this reason, after a head and shoulders top is
        completed, it is better to give the market enough chance to lay out the bearishness
        of the pattern.  The minimum downside objective is the difference between the high
        and the neckline subtracted from the point of breakdown. 

              The situation becomes much more dangerous when many of the most important
        indexes and ETFs show clear clear and shoulders patterns.  This is partly because
        the pattern's very appearance scares many traders.  The pattern's bearishness
        has a large self-fulfilling aspect.  But there is more to it than that.   It is the clear
        closing below the neckline which is a judged SELL.  The NYSE AD Line normally
        confirms the break below the neckline.  In 2010, this occurred a day later.  Instead,
        the number of such patterns in indexes and ETFs was the cause for our heightened
        concern and recommendation to sell over-extended stocks with declining CLosing
        Power trends and sell short stocks breaking below their 65-day ma if they showed
        a head and shoulders top.

             See the recent head and shoulders tops in DJIA, NASDAQ, SP-500, OEX, SPY, DIA
         and QQQQ.
                                                            DJIA

                                                            NASDAQ

                                                           SP-500

                                                         NYSE


                                               WHY WE NEED TO HEED
                                    HEAD AND SHOULDERS PATTERNS

            The stock market does not always discount future events.  There are many
     events that traders could not possibly know about long in advance.  What we
     have discovered is that head and shoulders patterns are often the way the
     market quickly adjusts to bad news.  The degree to which the British Petroleum
     rig would unleash a volcano of oil on the Gulf Coast was not immediately known,
     though Goldman traders knew sooner of the dangers than the President
     and so, they sold short on this news.  "Suck it, fishies and birdies!" wrote
     a Goldman trader.

            What is important to understand is just how often head and shoulders patterns
     appear when a very bearish event must be quickly factored into the stock market's
     prices.   We see this over and over.  While head and shoulders patterns have
     long been recognized as bearish, what is new here is the discovery of how often
     the bad news which follows them is sudden and/or highly significant.


                     

           Head and shoulders tops seem to appear when the stock market must deal with an
     unexpectedly bearish event, such as:
           
                  1941 - Japanese attack on Pearl Harbor,
                  1950 -  the North Korean invasion of South Korea,
                  1955 -  the Eisenhower heart attack,
                  1962 - Cuban Missile Crisis
                  1963 -  the JFK assassination
                  2001 - 9/11 Attack
                  2010 - the BP-Oil-Gulf  Coast Catastrophe.

            In each past case, watching for the A/D Line to break its steep downtrend would have
            given good signals to BUY.

                              1941 - Japanese attack on Pearl Harbor

                                   1950 - North Korean invasion of South Korea 

                                            1955 -  the Eisenhower heart attack        

                                                   1961 -  Cuban Missile Crisis

                                                             1963 -  the JFK assassination

                                                 2001 -  9/11 Attack

               In this case, there was no Peerless Buy signal, so using the A/D Line trend-breaks
         should not have been applied to the trading the DJIA, so much as individual stocks.
         The 9/11 attack followed by 10 weeks the completion of the head and shoulders pattern.