Now take a look at the daily chart of the Dow Jones Industrial Average. Look similar?
Anyway, back to the megaphone pattern...why do we care? Trending123.com concludes its description with the following:
The pattern occurs after the bulls have been charging and driving the stock price 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 triumph.
I think we can say unequivocally that volatility has been increasing as the year has wore on. There is a tremendous sense of skittishness out there - like every investor is terrified that his chair won't be there when the music stops.
So I've been saying for months now that markets have looked vulnerable. Even though the S&P and Dow just hit new all-time highs, something just doesn't feel right. They're making these highs on lower and lower volume, with less and less underlying participation. While I didn't show it on the graphs above, the Advance/Decline Lines for the Dow and S&P both peaked back in May and are nowhere near those levels today. These are huge non-confirmations of the recent rally.
Speaking of non-confirmations, the Russell 2000 Small Cap Index, the canary in the coalmine for the broader markets, is still 3.5% below its all-time high set back in July. Take a look at its series of lower highs and lower lows. This should be concerning, particularly when you consider the Russell typically leads the other indices.