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A Very Bullish Chart Pattern Could Be Forming, But Does Anyone Care?

A head-and-shoulders pattern is taking shape on the IWM

by 8/16/2012 12:55:39 PM
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My colleague, Joe Bell, recently wrote a great piece on why small caps could be a buy based on their underperformance relative to big caps, and why this could be bullish for the overall market. I then took some of his ideas and discussed them with the Wall Street Journal yesterday.

First off, there's one thing I'd like to get off my chest: Isn't it interesting how quickly we tend to hear about all the bearish patterns that are forming, while hearing very little regarding any bullish patterns? From rising wedges, to double tops, to poor breadth, it seems like that's all I ever read about regarding technicals. I've talked a lot about how negative market sentiment is right now and how this bodes well for a prolonged rally. Speaking of which, maybe when we stop calling rallies a "melt-up" and call them a "bull market," we will be closer to a top. But as long as we keep referring to higher prices as a "melt-up," I think this backhanded compliment has bullish contrarian implications.

Now, onto the chart that could be a very bullish signal. The iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) is forming a very nice looking head-and-shoulders pattern that, if resolved higher (as I expect), could produce some very impressive gains. To keep this simple, if you measure from the neckline to the bottom of the head you get about 24 points, or an upswing of roughly 30%. In other words, should this pattern resolve higher, the target for the IWM would be up around 108. That's quite a target, I'm aware, but with all the negativity that is still out there, this could very well be achieved over time. Remember, there isn't necessarily a timeframe for this to happen, so maybe it's more of a longer-term target. (Click chart to enlarge.)

Weekly Chart of iShares Russell 2000 Index (IWM) since August 2010
Chart courtesy of StockCharts.com

In conclusion, keep your eyes and ears open for any talk of this bullish pattern. If the past three years have taught us anything, it's that we don't want to hear much about this very bullish pattern. Let's just keep listening to all the end-of-the-world predictions and bearish chart formations, while continuing to ride this bull market for all it's worth.

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