Wednesday, June 3, 2009

Head and Shoulders on Dow in Reverse?

So. Yesterday's mini cup-and-handle broke to the downside after all, and we are having a rather dismal market. Dow Jones Industrial Average is down 131 points (1.5%) to 8,610. It is supposedly because of the uncertain economy (which was the case during Monday's rally), but more likely a profit-taking and some consolidation effort. As long as it doesn't collapse significantly from here, it is OK with me, even though they are whacking ALL my commodity stock holdings badly.

I am watching if Dow breaks below these levels: 8,592 (May 20 intraday high), 8,575 (May closing high), 8,502 (June 1 open), 8,214 (May 4 open, and support throughout May). So far, they are all holding, and probably will hold today if GS and JPM decide to dump at the close.

So, while I endure the commodity pain, let's examine if there's a case for those "green shooters" who believe "the worst is over" and that we are on our way back to the level seen in last September, before Lehman Brothers went bankrupt.

This is a chart that shows a potential "head and shoulders" pattern. The left shoulder and the head have already been formed, the right shoulder is yet to form. This pattern is considered bearish, and usually breaks down at the neckline, if not on the very first attempt.

So what's "green shooting" about this? Because this is a 1-year Dow daily chart flipped upside down and horizontally. In the original version, therefore, it is a reverse head and shoulders pattern, which many chartists consider bullish. To complete the neckline on the reverse-head, Dow needs to pop above 9,000. Then the correction, March low re-test could come, but then the index will go back to the neckline area, and eventually break the line to the UPSIDE.

That must be the thinking...

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