Over the course of the last few months, many prominent chartists have made the comparison between the head and shoulders pattern from the 2007-'08 time period, to now. And there's good reason for doing so. Charting is largely about looking for repetitive patterns. Charts don't always repeat exactly the same as in the past, but they often rhyme.
It was at that point where the market hit important resistance from December of '07, and the rally failed. The decline picked up new steam in the second half of 2008 and really fell off a cliff from October '08 to March of '09. What stands out in the '07-'08 chart are the two RSI divergences that occurred right before and just as the rally was failing. See the shorter time frame chart to see those divergences.
Longer term view of '07-'08 market top:
Longer term view of current market:
Shorter term view of '07-'08 showing RSI divergences
Current market snapshot:
So when attempting to divine the forward course of the broad indices over the intermediate term, its very important to review action on a daily basis and look for clues. No one indicator is 100% reliable or actionable, but subtle changes and divergences can show up at any time.
From June through December of 2007, the broad market traced out a large head and shoulders pattern, which we know led to a monstrous bear market in 2008 and into the first few months of 2009. From February though July of 2011 the markets traced out a similar head and shoulders pattern, which led to a sharp decline of just under 20% in the first part of August.
But what's most interesting is the market action in the months that immediately followed the initial pattern formations. In 2008, after an initial plunge in late December '07 into early January of '08, the S&P 500 traded in a sideways, jagged consolidation for 8 weeks as it tried to stabilize. Starting in mid March of '08, the market rallied off the lows for 9 weeks.
The biggest difference just looking at these charts that I see in the two comparisons is the length of the rallies off the intermediate bottoms. The current rally is 14 weeks long, whereas the rally off the intermediate lows in 2008 lasted only 9 weeks.
Also, the current market indices appear to be forming a base-on-base type pattern while the rally in '07-'08 was confined to more of an upward channel.
Longer term view of current market:
Shorter term view of '07-'08 showing RSI divergences
Current market snapshot:
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