Possible Bearish Head & Shoulder Pattern On The NASDAQ?

The recent downturn in the markets has traders looking at all possibilities of chart patterns.

Looking at the NASDAQ chart the recent sell off has one wondering if this is a negative pattern shaping up in this index. So the question is will the index resume its five year bull market? Or break the neckline and drop into a good old correction?

The recent rotation into late bull market sectors such as Oil, Consumer staples and Utilities has me thinking that this could resolve into a major correction. Traders won’t know for sure until the neckline is broken but the current pickup in volatility and sector rotation has me concerned.

Let’s examine the chart and see where the break could be. Looking at the NASDAQ below we can see the long bullish channel going back to November of 2012 which has now been broken. A recent bounce off the 200 day moving average has given the index a lift to form the right shoulder.

The March and February lows, along with the recent low gives the chart neckline. A head and shoulder pattern is also in a declining formation. A break below the neckline around 3940 to 3930 area would complete the pattern, so watch that extended trend line.

Rising volatility along with rising volume and a break of the line would be very bearish for this index. The current sector rotation is message from the markets to be careful going forward.

Risk is always a factor in these setups, so size your trades to your own personal risk tolerance.

(Chart courtesy of TC2000)