4 Potential Head-and-Shoulders Trades

03/17/2011 7:01 am EST

Focus: STOCKS

A wild and news-driven week continues for the markets, but traders looking for new ideas shouldn't overlook the bearish patterns setting up on the charts for some major market indexes.

By Zev Spiro

It has been a very interesting week so far in the markets. World markets are still being spooked by Japan headlines, but the reactions are starting to diminish. However, the major market indices still have significant tendencies to gap down at the opening bell.

The iShares Russell 2000 Index Fund (IWM), PowerShares QQQ Trust (QQQQ), and Spyder Trust (SPY) all recently ended their intermediate uptrends, as signaled by confirmed breaks below their 50-day moving averages and intermediate uptrend lines. Only two trends remain: sideways and down. Many individual names have bearish distribution patterns forming and triggering, alluding to a similar scenario for the aforementioned indices.

Below are potential bearish distribution scenarios for these three indices, followed by a trade idea in MSCI Inc. (MSCI). These patterns are not fully developed and have not triggered (except QQQQ), therefore, they should only be used as a roadmap for a possible bearish scenario, as the trend is subject to change at any time.

Head-and-shoulders patterns in the indexes over the past few years have not been very reliable, but they are still worth looking at.

PowerShares QQQ Trust (QQQQ): The daily chart below illustrates a bearish head-and-shoulders pattern that triggered with confirmation. This is the only chart of the three index ETFs mentioned that has a fully developed chart pattern.

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iShares Russell 2000 Index Fund (IWM): This daily chart illustrates a potential head-and-shoulders pattern that may form. It suggests a bounce in the near term that will then roll over. Resistance may be found at either (or all) of the following points: 1) Minor downtrend line, 2) 50-day simple moving average (SMA), and 3) Gap from March 10.

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Spyder Trust (SPY): Outlined on the daily chart below is a potential head-and-shoulders distribution pattern using daily closing prices. Same resistance areas as IWM apply here.

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MSCI Inc. (MSCI): The intermediate uptrend broke in mid January, as signaled by breaks below the 50-day SMA and the intermediate uptrend line (highlighted). There was a surge in volume accompanying the breaks, which added validity to the change in trend. For the past six months, a bearish head-and-shoulders pattern was developing. A confirmed move below the neckline at $34.84 would trigger the pattern and violate the 200-day SMA.

Trigger: Confirmed move below neckline at $34.84

Target: Minimum expected objective is $27.50

Protective stop: Confirmed move back above the neckline

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By Zev Spiro

If you have any questions or comments, please e-mail me at zevspiro@oripsllc.com with the subject line "MoneyShow."

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