This head and shoulder pattern was confirmed when the market closed below 1770, however full confirmation comes from the weekly chart with a weekly close below 1770. The pattern would be invalidated if the market is able to rally above 1800.
The head and shoulder pattern has a neckline that is plotted between the two lowest points of the heads and shoulder pattern. With the S&P 500, the neckline is a horizontal line near 1770. The combination of the neckline and the head is used to calculate downside targets; the height of the pattern is projected down to give a pattern target near 1692.
The validly of this target is confirmed when it coincides with an established historical support feature. The 1692 pattern target is close to the support and resistance level that developed in July, August and October of 2013, which suggests this is a reasonable support level for any fall below 1770.
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A fall to 1692 would represent an 8 percent retreat from the peak high near 1840. In the broader long-term analysis this suggests the market can retreat to 1692 and still remain in a long-term uptrend. A retreat of less than 10 percent is a technical correction in the trend rather than the end of a trend.
As the market falls towards the head and shoulder downside target it is important to remember that this pattern target points the way to the first support consolidation in any market fall. Investors should watch the pattern of development near 1692 to determine if this is technical correction, or if it has the potential to develop into a longer-term downtrend.
— Disclosure: The writer holds an open position in the S&P Asia 50 Exchange Traded Fund.Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.