Rare Megaphone Pattern Emerging
The US equity markets are showing signs of an emerging megaphone pattern. This pattern is relatively rare and is distinguished by a series of higher highs and lower lows. This is a bearish pattern for the markets as the creation of the pattern reflects a period of time when bulls and bears are battling to gain control of the market. The pattern occurs after the bulls have been charging and driving stock prices appreciably higher.
During the formation of the Megaphone Top, however, bears are exerting increasing influence on the stock and causing it to set a series of lower lows. The increasing volatility eventually creates a sense of uncertainty, leads to profit-taking, and deters some of the bulls from making any further commitments.
The bears eventually win the battle:
This will be interesting to watch as we are entering a seasonally strong period for stocks. Money managers typically get more aggressive this time of year in anticipation of year-end corporate and federal spending (they need to spend it or lose it). However, the continuing Greek crisis may be have money managers hesitant to buy into this market.
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