The SPX is a good proxy for the rest of the stock markets for the most part. How the 500 biggest cap stocks are doing should filter down through the food chain. So if the S&P 500 is topping or bottoming it stands to reason that the other stock market indexes will look some what similar. I’ve been watching the SPX very closely for the reasons mentioned above for signs of a top. Lets start with the 60 minute look that shows in detail the formation of a H&S top pattern. The biggest clue that a top maybe forming was the 5 point rising flag that broke through the bottom rail last week. Remember an odd number of reversal points creates a reversal pattern, and in this case the bottom rail was broken. If the SPX had broken out to the topside the pattern would have been a consolidation with four reversal points which is a totally different story. The first thing you need to see when creating a H&S is a hard break off the head area that takes prices below the top of the left shoulder. When that happens it is showing weakness as the top of the left shoulder should have acted as support. Once I see a hard break like that I will then look for a counter trend rally. Once we get a counter trend rally you can then connect the bottoms of both shoulders that creates the neckline. Once you have a possible neckline I like to draw a neckline symmetry rail that is parallel to the neckline. What this does is gives me a rough idea of where the top of the right shoulder may form. This is just a rule of thumb as many times the right shoulder can be much higher or lower than the neckline symmetry rail may suggest. Once I’m able to draw in the neckline I like to watch the price action and see what develops as a possible right shoulder. Many times the right and left shoulders will consists of a four point consolidation pattern. As you can see on this 60 minute chart of the SPX the right shoulder has four reversal points and looks like a bear flag. We are in the process of backtesting the bottom blue rail of the bear flag as we speak.

Now lets look at the daily chart and see how this possible H&S top pattern fits into the bigger picture. Remember a H&S pattern generally shows up as a trend reversal pattern coming in at tops and bottoms. They can also be a consolidation pattern which is much more rare. Note the H&S consolidation pattern that formed late last year that worked out very well. Alot of times when you have a rising wedge the top part of the wedge may encompass part of the H&S top. In the chart below you can see the rising wedge takes in the left shoulder and the head with the right shoulder as failed backtest. Our current possible H&S top is not a big one as seen in some other charts but the function of the H&S top is to reverse the trend. Sometimes a small H&S pattern will show up at a major top that reverses the uptrend for many months. The important thing to know is that it is reversing the trend and until some type of reversal pattern is built the trend will remain in place with consolidation patterns that show up along the way. So watch the neckline very close as a break will signal the completion of the pattern.

In this weekend report I would like to show you some very important H&S top patterns that are telling a very big story that has not been read by alot of investors. These big H&S top patterns are telling me that we are now entering into another deflationary event that won’t be recognized until its too late for most.The big mining stocks like RIO, BHP and FCX are strongly suggesting that we are about to enter into a global slowdown that hasn’t been seen since since 2008. You can speculate with the fundamentals as to why this maybe happening but for this exercise I want to show you from a chartists point of view the groundwork that is being laid, right now, by the all important Head and Shoulders topping patterns.

If there is one chart pattern that I pay close attention to is a H&S pattern as they often show up at turning points from the short, intermediate and long term perspective. There is a reason psychologically why these patters tend to play out like they do. As we are going to talk about H&S top patterns I’ll explain why they look the way they do. First of all when a stock is in rally mode it will move up on heavy volume as investors jump on board. There will be some consolidation patterns made on the way up that help keep the uptrend intact. When the move starts to mature the buyers start to get exhausted and from one last consolidation pattern. This last consolidation pattern is usually the left shoulder or the initial start of the H&S top pattern. The buyers then make one last move higher breaking above their last consolidation pattern. Volume can be heavy on this last move higher as the buyers and sellers fight it out for control of the trend. As the buyers were nearly exhausted during the formation of their last consolidation the sellers easily win the fight as the buyers have no more ammunition left to fight with. This now leaves us with a left shoulder and the top of the head. At this point is where the momentum shifts to the bears. The bears now take control and push the price below the top of the previous left shoulder. The top of any consolidation pattern should generally act as strong support during the uptrend. By the bears taking the price down below the top of the left shoulder is a clear cut warning sign that the buyers have left the building. Alot of times the move down will end close to the bottom of the left shoulder where previous support came in. The buyers then make one last attempt to rally the stock back up but the bears are now in control and the buyers quickly run out of buying power. This last rally attempt falls short of the previous high and creates the right shoulder. The last thing that needs to happen is for the price action to fall below the neckline which is made by connecting the bottom of the left shoulder and the bottom of the right shoulder. Once this neckline is broken to the downside the H&S topping pattern is complete. The bulls may muster up one last little rally that would be called a backtest to the underside of the neckline which happens in many instances. I often talk about an odd number of reversal points being a reversal pattern and an even number of reversal points being a consolidation pattern. A H&S top pattern has 5 reversal points at a minimum. A double top has 3 reversal points. An odd number of reversal points in a triangle or rectangle has to have at least five or more to create a reversal of trend. When viewing the following charts, especially on the weekly and monthly look all the other H&S patterns that show up at critical turning points.

Now that I’ve laid out the groundwork for the H&S top pattern lets look at some in real time and in different stages of development. The first H&S top pattern I would like to show is still developing the right shoulder and is coming down to test the neckline. This is a classic example of a H&S top pattern that has all characteristics described above. The CDNX has very nice symmetry. Note the left and right shoulders are four point consolidation patterns. The expanding triangle formed the left shoulder on the way upand the bearish rising wedge has formed the right shoulder on the way down. This pattern won’t be complete until the neckline is broken to the downside.

The next chart still has a ways to go yet but the right shoulder is carving out a bearish rising wedge that should break to the downside leaving the right shoulder sticking out like a sore thumb. This chart of EEM, emerging markets index,  is a good clue to the global slowdown that is about to take place. Notice the big unbalanced H&S top pattern that formed back in 2008.

If the global economy is about to slowdown some of the big mining stocks should be showing signs of weakness. Lets start with the weekly chart of BHP that is showing a H&S top that is still carving out the right shoulder. Note the smaller H&S top pattern that is making up the head area of the H&S top pattern.

Lets take a quick look at the monthly chart of BHP as it tightens up the look for the H&S top.

The FCX monthly charts shows a very similar looking H&S top as compared to the BHP chart. Note how the top of the head is at the same height as the 2008 double top pattern. The old highs that were made back in 2008 are showing up to be resistance points in the current rally phase for alot of the basic materials stocks. Where to look for a H&S top pattern is also an important point. When you reach an old high begin watch the price action very closely for sings of a top.

Below is a chart of another big miner that shows the right shoulder still in the developmental stage. Note the parabolic rally phase that accompanied the big 10 year rally that began in 1998. The top of the head is a Fibonacci 50% retrace off the 2008 crash lows.

If the big miners are looking toppy in here lets look at the IYM index that tracks the basic materials stocks. Like the big miners the IYM index is carving out a right shoulder like so many stocks in the basic materials sector. Again you can see the this index has rallied all the way up to the previous high made in 2008. The head is made up of a smaller H&S top pattern.

Next I would like to show a chart of US Steel that was one of the first stocks to complete it’s H&S top pattern suggesting the demand for steel has been rather poor. Another little clue for a global slowdown. Note how weak the rally was off the 2008 low. It didn’t even come close to reaching it’s 2008 high.

Lets look at another basic materials stock MOS which is getting close to the neckline. This stock has also failed to achieve the top made in 2008 before it ran out of gas.

I really like this next chart and its implication going forward. This daily chart of GASO is just 5 days out of its H&S top formation. This chart is suggesting that the top is in for gasoline and prices may start to fall fairly rapid as suggested by reverse symmetry. Reverse symmetry means, how a stock goes up, in this case gasoline, didn’t make any real consolidation patterns on the way up so there won’t be any shelves of support as prices decline. So the price action may go down just as fast as it went up.

Next I would like to look at some of the precious metals stock indexes as they are part of the risk off trade. As you will be able to see they are further along in their decline than most of the other commodities. You could say they are leading the way down and everything else should follow. The first chart is a line chart of the HUI that has broken its big neckline well over a month ago. You can see the nice backtest to the neckline that was actually a little rectangle consolidation pattern that shows up on the daily bar chart. This big H&S top pattern has a price to 360 at a bare minimum and probably much lower before this phase plays out.

The next weekly chart is of the GDX that shows the neckline being broken 3 weeks ago. It has been in backtest mode to the underside of the neckline to around 48.50 or so.

Lets look at one more PM stock index the XAU that shows it has been out of it’s H&S top formation for 6 weeks now. Note the two red patters that make out the left and right shoulders.These big necklines are your line in the sand. Below them is negative and above is positive. So until these PM indexes can get back above their respective necklines I have to rate them as negative.

I want to show a chart of the GDXJ that is a small cap miners index that is giving me great concern if one is hold the little guys. There is a big H&S top pattern that shows up on the weekly and monthly chart that is very ominous looking. The weekly look shows the big H&S top pattern that has broken the neckline and a backtest to the underside of the neckline was successful last week. Keep this thought in mind. Below the neckline is negative and above is positive so until the GDXJ can trade back above the neckline I have to view this chart as bearish. The price objective for this H&S would just about cut this index in half. Note the smaller H&S top pattern that formed as the head.

If the precious metals stocks indexes have a bearish looking H&S top then it stands to reason that the individual stocks that make up these indexes will also have a similar looking pattern. Barrick Gold is one of the big cap precious metals miners that shows an uncanny resemblance to the PM indexes.

Another big cap precious metals stock is NEM that shows a smaller H&S top pattern that completed a couple of months ago. Note the brown horizontal area on the chart that should have offered up some support. The fact that NEM broke below that critical support zone now puts that brown area as resistance on any rally attempt.

Lets look at one more stock that shows the H&S breakout. AU is in it’s second month of decline from the time it broke it’s neckline. Keep in mind we could get a backtest to the neckline at anytime. The longer and further the price falls the less likely a backtest will show up on a monthly chart.

There is one more chart I would like to show you that shows why gold has been unable to move higher.This is a combo chart that shows the HUI on top and gold on the bottom. Even tho gold has been outperforming the HUI  they both create similar consolidation and top patterns. On this last chart below I’ve added a purple dashed vertical line that represents the breakouts of each pattern that has formed on gold and HUI. I have marked in yellow the previous H&S top in 2008 and our current H&S top. As you can see both the HUI and gold have broken out to the downside out of their respective H&S tops. Gold has been bumping up against its neckline and that is the reason it hasn’t made any progress.

For me, all these H&S top patterns are speaking volumes as to the condition of the markets. I could show you many more examples of topping patterns but I think these charts says it all. As you could see in the charts above, they are in different stages if development. Some are working on the top of their right shoulders while some have already broken below their necklines. I know many analysis are calling for a bottom in here based on some of the technical indicators or fractals based on the 1970’s bull market in precious stocks but these chart patterns trump all the indicators IMHO. The old wall street adage, markets can stay overbought or oversold longer than one can stay solvent. I think applies to our current situation.
All the best…Rambus

Below is a 60 minute chart I’ve been tracking Apple Computer with. After putting in a small H&S top pattern AAPL then went on to break the bottom blue rail of the 5 point bearish expanding rising wedge. You can see the initial break was pretty hard. The backtest to the bottom blue rail of the expanding rising wedge was spot on. So now all the work is done with the breakout and backtesting. As it was a parabolic move up the chances are real good that the move down will be just as fast if not faster than the move up.

The daily chart for Apple Computer shows a big gap just below the most recent low. A close below that gap will help insure the top is in.

The weekly chart shows the near vertical move Apple made once it broke out from the 6 point bullish expanding rising wedge.

Last week I posted a chart on gasoline that showed we could be in a topping pattern, as part of the risk off trade. After putting in a right shoulder last week gasoline broke the neckline on Monday. There is also a much bigger pattern in play here as well and that is the big double top. The previous top was made just over a year ago last May. There is a good chance that the price of gasoline could fall pretty fast as the rally leading into this most recent top didn’t form much in the way of any consolidation patterns. So when the price starts to move down there aren’t many shelves of support to help stem the decline. I call this reverse symmetry. How it went up is probably how it will come down. Also notice the huge gap just below the neckline. This is an important chart for the risk off trade IMHO.

Its the moment of truth for PCLN as it’s now doing the backtest to the neckline. This is a low risk entry point if one wanted to buy some put options using the neckline as your line in the sand.

PCLN broke down from a H&S top reversal pattern today. The reasons I’m showing you this stock is so you can see what a real strong uptrend looks like. Note the red bullish rising wedges and a bullish rising flag. They are all pointing up instead of down. In a normal move the little red patterns would point down. This chart says the parabolic move is now over and a hard fast move lower should now develop. APPL also broke down today.

GDX is now testing critical resistance from the bottom blue rail of the 5 point bearish falling wedge and the red consolidation pattern that sits right on top of the bottom rail of the falling wedge. The backtest comes in at 48 for both patterns.

For eighteen months the HUI has been chopping out a sideways trading range that looked like it had the potential to be a huge consolidation pattern. Even up to the first of March the big sideways trading range could have been what all gold bugs were hoping for a giant consolidation pattern that would have suggested substantially higher prices going forward. But it wasn’t meant to be.There are two topping patterns that are one and the same that showed their hand over the last month or so. Each topping pattern had a different breakout point and backtest, that for me confirmed the individual patterns.

The first topping pattern for the HUI I want to show is an eleven point DIAMOND reversal pattern. For the most part whenever you have an odd number of reversal points, in a sideways trading range, the pattern will be a reversal pattern, reversing the current trend. An even number of reversal points creates a continuation pattern in the same direction as the preceding trend. As you can see on the chart below the diamond has eleven reversal points making it an 18 month topping pattern. This is a significant turn of events if you have been waiting for this huge trading range to breakout to the upside. This big diamond reversal pattern changes the whole character of the game, for now,  if your a gold bug. After 18 months of chopping sideways in a trendless move we now have a confirmed downtrend that suggests much lower prices for the big cap precious metals stocks. The breakout came at 515 in the first week of March that was accompanied by a nice breakout gap. The backtest confirmed for me the breakout was for real and the big 11 point diamond reversal pattern had completed. One last note. Last week we finished off the fist consolidation pattern to the downside that is a small rectangle that also broke out with a breakout gap.

Lets look at the weekly chart to put this diamond into perspective within the big picture. Generally, a top usually takes alot longer to form than a bottom. Note the big H&S top that formed in 2008 that took close to one year to form. Next look at how fast the crash bottom took to form. It only took about 5 weeks before the crash was reversed. Now observe our 11 point diamond reversal pattern that took right at 18 month to complete. We are now in the 6th week since the breakout which is still very early in the new downtrend,

There is another obvious topping pattern that few if any chartists are seeing at this time. It stands out like a sore thumb on a daily line chart. Like the 11 point diamond reversal pattern this huge H&S top is also a reversal pattern. Its really very beautiful with nice symmetry that has two left shoulders and two right shoulders and the head that is higher than both shoulders. The breakout came alittle lower than the diamond at 484 but the breakout and backtest were picture perfect. Note the little red rectangle that has formed just below the neckline as the backtest. This is technical analysis at its finest. This big H&S reversal pattern has a minimum price objective down to the 370 area on the line chart. Keep in mind this is an absolute bare minimum. Prices can fall much further if things really start to get negative.

There is one more chart I would like to present that shows the pain that most gold bugs have been feeling for way too long. The HUI to GOLD ratio chart does a good job of showing how poorly the big cap precious metals stocks have been doing compared to gold. There is nothing pretty about this chart IMHO as it puts into perspective how bad the situation has become for holders of precious metals stocks. The first real area of support may come in around .23 where a small consolidation pattern formed back in 2001 when the precious metals stocks were in their heyday and where the crash of 2008 found support. Looking at the most recent price action it appears to me that the HUI is starting to accelerate to the downside against the price of gold. This is a very unhealthy situation for the big cap precious metals stocks.

I know these charts are not what you want to see if you are a precious metals investor but looking at reality can sometimes save you from a huge draw down in your precious investing capital. I don’t believe this is the end of the precious metals complex bull market. As the stock markets have been enjoying a cyclical bull market in a secular bear market its probably time that the precious metals complex has a cyclical bear market within its major secular bull market. There will be some major bargains down the road if one has the capital to pick them up on the cheap.  All the best….Rambus

For those subscribers that don’t feel comfortable about going short, this HUI to Gold ratio should give us a good entry point for a counter trend rally in the precious metals stocks. Right now it looks like the .23 area should produce a good oversold bounce that will be worth a shot to the long side. Keep in mind this will not be a long term trade but a trade against the main downtrend. If the HUI keeps under preforming gold like it has been it won’t take that long to get there. This is a good time to get your shopping list together for when the time comes.