Another Technical Analysis Lesson – Head and Shoulders Pattern
MR’s forecast of more market chop around the 50 SMA this week has played out so far. The criss-cross of the 50 SMA happened for the 10th time today on the S&P 500 in 12 days. Our bias was bearish going into the week on Sunday night and Monday was down 185 Dow points near its low. Since then, it did bounce up off that low and actually finished back above its 20 and 50 SMA today after Apple’s blowout surprise earnings. And yes, the heavy selling in Apple Inc. going into earnings clearly had the analysts and many short sellers caught on the wrong side.
At this point, the three major US markets were able to recapture their key 50 SMAs as well as their most important breakout levels from the last 30 days. COMP at 3,029 (>3,000); S&P 500 at 1,390 (> 1,375); and DJIA at 13,090 (>13,000). However, the markets were on the brink of a big selloff and technical breakdown on Monday (see later chart). The only savior was Apple’s blowout earnings today which caused yet another short squeeze up for the markets.
The chart from Sunday’s newsletter is still valid even after today’s strong close at 1390.
Bullish Above 1400 and Bearish Below 1370
Technical Analysis – May Selling Could Be Coming Again with a Head and Shoulders Breakdown
The markets were on the brink of a big technical breakdown from a Head and Shoulder’s pattern (see graph below from Monday) but they survived with Apple’s help. We have outlined this pattern numerous times before and recently showed a bullish Inverse Head and Shoulders pattern that could be forming in gold and silver (Technical Analysis | Gold and Silver).
Taking a look at the graph below, the neckline was briefly breached on Monday but the market was able to recover back above it. If the neckline is eventually breached with volume and momentum, the lower target is a 6% drop down to 1283 on the S&P 500 (8% from here). The neckline is around the 1368 to 1371 level now.
A Confirmed Neckline Breakdown Is Probable for May
The reason for our bearish bias going into May has been made clear before in our recent newsletters. A breakdown could repeat again in May based on the last 2 years’ history in 2010 and 2011 as the charts show below. Here are the charts from the last 2 years for the 6 week period from late April to the middle part of June.
Big Selling in May and Early June 2010 (15% Loss)
Big Selling in May and Early June 2011 (8% Loss)
The institutions have been burned badly the last two years in May and will surely protect this time around on any hint that a downtrend is starting again. In fact, had Apple missed its earnings last night, there is no doubt the heavy selling would already be in full swing going into May.
The bottom line is that we continue to stress caution and recommend fewer equities here. There is an increased downside risk based on recent past history and the Head and Shoulders pattern shown above.
For now we will wait to post more of our HOT Stocks in the momentum stock investor series. For the power stock picks tonight, MR is going to select 10 shorts that could fall quickly if selling kicks in again and into May as history would predict.
To get our weekly TOP stock and ETF picks and detailed market commentary automatically sent to your email, enter your name and email address in the form below.
Check out our newest FREE promotional offer called the MR Market Crusher Pack for 2012 (click link). It includes 5 very valuable investor products worth $600 to get you started with a bang in 2012 for your retirement account.
Investors can take advantage of our best investor services in our premium Gold Investor Membership. Get access to the top Momentum Rider investor portfolios, Special Reports, and stock picks by trying it out risk free for a few months. Get instant access now to the MR “Gold Investor Membership”… get more info
Good luck in your trading and investing,
This BLOG POST is brought to you by the publishers at Jalexa Trading Consultants, L.L.C. Nothing in this post should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. Any investments recommended in this blog post or through any of its advertisements should be made only after consulting with your investment professionals and only after reviewing the financial statements of the company or investment.
© 2012 Jalexa Trading Consultants, LLC. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the internet), in whole or in part, is strictly prohibited without the express written permission of Jalexa Trading Consultants, LLC.