Head and shoulders

Evening one and all,

If you recall my post at the beginning of the year, I signalled caution for the year ahead as there was indication of a massive head and shoulders pattern on the STI. A month has passed, and I want to bring us through a few charts today.

First up, let us look at the Nasdaq 100. You may not recall, but I posted a chart of Nasdaq quite a long time ago showing a breakout from a huge inverted head and shoulders. This one spans 3 years. I do not “trust” in massive patterns much, as I do not have enough experience seeing how they perform. However, looking at the chart of the Nasdaq now in year 2012, the pattern is performing quite well. The recent rally in equities is pushing the Nasdaq to high levels (of course, it is still nowhere compared to dot-com bubble days). As a short-term trader, the breakout from the massive inverted head and shoulders will not influence my trading much for this year, I will still monitor this chart with the pattern on it. It will be interesting to see what happens in the years ahead. A projection based on the pattern will be for the Nasdaq to trade above 3200/3300!

Next, I have identified a smaller inverted head and shoulders. Basically, it sums up the Nasdaq’s movements in year 2011. It is an ugly inverted head and shoulders, but I still see it as one. An important thing is, we have a breakout. Projection puts the Nasdaq up to the 2700 region. If the current surge continues, we could get there in less than a month even. But, it will be more realistic to give the Nasdaq some more time. So, this is the latest development on the Nasdaq’s chart.

Next up, we have the Russell 2000. Straightaway, let us pinpoin the head and shoulders that was looming on the chart ever since the start of this year. At first, I was wary of it since head and shoulders are supposed to mean downside – especially one that comes after a run-up. However, as usual, the market had her way with me. What is happening now? The strong surge in January is forcing me to accept an upward breakout from the right shoulder of the head and shoulders formation. I have learnt from a very good technical analyst based in America that we should expect this event called a “head test” when we see an upward breakout from a head and shoulders pattern. Simply put, price will breakout from the shoulder and head towards the “head area” – in this case it is above 800 region on the Russell 2000. So right now, the Russell is experiencing a head test – make or break time. If we blow through this region easily, then this year should be a very strong one for equities – or the mid-cap american stocks at least; however, if we fail here, we should expect the Russell 2000 to decline considerably.

Now, we have our beloved STI. If you want to look back, here is the link: https://technicalanalysistalk.wordpress.com/2012/01/08/general-theme-for-2012/ 

Okay, the STI has only recently broken through the 3000 barrier, unlike the US indices that have been soaring through resistance levels. If the STI takes cue from continued buying pressure elsewhere, then I have to see it as an official upward breakout from the 2-year old head and shoulders. And, as I just said above, we look for the STI to race up for a head test which comes in at around 3100-3250. So, for now a short-term target for the STI is pegged at 3100.

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.


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