"I know you don't have much faith in head and shoulders formations, but HSI hasn't half got one at the moment.

"Any thoughts?"

David Fuller's view Yes, because any ranging pattern of some duration will produce shapes that roughly conform to H&S. People were busily identifying them earlier this year, alone with the 'Death Crosses' and 'Hindenburg Omens', not least in July when most stock market indices were reaching their correction lows.

My point is not that H&S and death crosses are without merit, although Hindenburg Omens are colourful nonsense in my view. Some large tops or bottoms at the end of bull or bear markets do have H&S characteristics (the Type-3, churning, time and size) reversals as discussed at The Chart Seminar) and these patterns will produce moving average crossovers. My point is that the context in which reversal patterns occur is more important than the shape.

So let's have a look at the Hang Seng Index (weekly & daily) in perspective.

Subscribers will see the descriptive shoulder, head, shoulder characteristics that formed recently. The Hang Seng Index has eroded support and now needs a close back above this month's highs near 23,650 to confirm a downside failure and to indicate a resumption of the ranging upward bias. I think there is a good chance that this will happen because the Index has fallen back to the upper side of a considerably larger trading range. I think that pattern should cushion downward risk and support higher levels over the medium term.

Incidentally, since the email above introduced the discussion of H&S, and I said they appear in any lengthy ranging formation, note on the weekly chart the small one forming late last year, with the head slightly above the two shoulders. Then note the inverse H&S with the low of the left shoulder forming in February, the low of the head in late May on the decline to 19,000 and the low of the small right shoulder in early September, which launched the rally to 25,000. If size matters, this formation should be more important than the pattern mentioned in the email.