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This Chart Pattern Hints at a Bullish Future

The bullish reversal pattern is appearing not just in single names, but also in whole sectors.
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Earlier this week, I wrote about the circumstances surrounding a technical pattern that has formed in shares of Tesla (TSLA) . That bullish pattern, known as an inverted head and shoulders, indicates that the stock could easily hit $1000.

Here's the good news for bullish investors: That pattern is appearing on quite a few charts right now. It appears not only on the charts of individual names, but of entire sectors.

First, we need to understand the pattern itself. The inverted head and shoulders formation is best known as a bullish reversal pattern. It normally appears in a downtrend, and signals the end of a bearish trend.

While this concept is common knowledge among technical analysts, many chartists are not aware that the inverted head and shoulders can also appear as a continuation pattern. This happens when the formation occurs in an uptrend, and that is happening on some key charts right now.

It's interesting to note that the pattern doesn't currently appear on the chart of the S&P 500. This tells us that stocks and sectors that display the pattern are generally stronger than the broader market.

First up is the SPDR S&P Pharmaceuticals ETF (XPH) . The fact that this ETF is stronger than the overall market should come as no surprise, as it represents a defensive sector. This ETF contains names like Eli Lilly and Co. (LLY) , Johnson & Johnson (JNJ) , and Bristol-Myers Squibb Co. (BMY) .

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Source: TradeStation

To help visualize the pattern, I've isolated the left shoulder (blue), the head (green), and the right shoulder (red). The pattern's neckline (black dotted line), near $43, is less than a 2% move away from Wednesday's closing price.

Not surprisingly, the pattern also appears on the charts of many individual names in this sector, such as Pfizer (PFE) and, to a lesser degree, Merck (MRK) .

Here's the pattern again, appearing on the chart of the SPDR Consumer Discretionary ETF (XLY) . This ETF contains familiar names like Home Depot (HD) , McDonald's Corp. (MCD)  and Starbucks (SBUX) .

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Source: TradeStation

Finally, we have the Technology Select SPDR ETF (XLK) . This sector contains tech stalwarts such as Microsoft (MSFT) , Apple (AAPL)  and Cisco Systems (CSCO) .

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Source: TradeStation

The charts of all three sectors look pretty similar, meaning there is no "stand-out" sector. Taken collectively, these charts debunk the widely-circulated myth that the current rally is being led by a half-dozen stocks. If that were the case, we wouldn't have three disparate sectors leading the market.

The bottom line: Don't be surprised if we see a broad-based rally that takes us back to the old highs and perhaps beyond, led by familiar large-cap names.

At the time of publication, Ponsi was long MRK, MCD, HD, SBUX, AAPL and MSFT.