A potentially bullish reversal pattern is appearing across the market: inverted heads and shoulders.
This chart formation involves two higher lows on either side of a lower low. It’s the opposite of a bearish head and shoulders, and is sometimes viewed as a sign that a decline is ending.
Inverted heads and shoulders have appeared on the symbols below. They’ve all lagged the S&P 500 this year:
- SPDR S&P Regional Bank ETF (KRE)
- ARCA Airline Index ($XAL)
- IShares MSCI Global ETF (EFA)
- IShares China Large-Cap ETF (FXI)
- Copper futures (@HG)
A different sentiment emerged more recently, with a shifts back to toward “risk on” sectors. Most of them would benefit from a stronger economy, especially overseas. These symbols would fit that bill.
Two big uncertainties remain — especially for global symbols like EFA and FXI. First, it’s not clear whether Trump’s calling an end to the trade war. He’s been more conciliatory recently but most investors don’t seem to believe it yet.
Second, Brexit is scheduled for October 31. Press reports yesterday indicated Brussels and Westminster are nearing a deal, which fueled a rally in the British pound. A resolution could lift a major cloud from European and global stocks.
In conclusion, the market has priced lots of negativity into certain stocks. But now some chart patterns suggest the fears may have run their course.