|Figure 1: RTH showing a head & shoulders pattern.|
|Graphic provided by: MetaStock.|
|The head and shoulders pattern is rather large and extends over a five to six month time frame. The left shoulder formed with the early September high at 91.20 and the head with the early November high at 94.94. Should the January high at 91.95 hold and the Retail HOLDRs break major support at 85, the head and shoulders would be confirmed and the downside target would be 75. The height of the pattern (95 - 85 = 10) is subtracted from the neckline for a downside target (85 - 10 = 75).|
Volume plays an important part in this head-and-shoulders pattern. The volume oscillator is the 10-day EMA for volume less the 65-day EMA. This is basically the difference between the two-week average and the two-month average. Volume is increasing when the oscillator is above zero and decreasing when below zero.
The early part of the advance witnessed a surge in volume (green arrow) followed by decrease in the summer months. Volume again expanded in the fall as RTH moved above 90 (blue arrow). These volume patterns are bullish, but volume patterns over the last three months have turned bearish. RTH declined in December and the volume oscillator moved to its highest level of the year as selling pressure increased (red arrows). There was an advance in January, but the volume oscillator formed a lower high as buying pressure was not nearly as strong as prior selling pressure. These volume trends (decreasing upside volume and increasing downside volume) favor a support break.
Figure 2: Daily chart of RTH showing a rising flag formation.
In addition to the head and shoulders, the advance over the last six to seven weeks looks like a rising flag that retraced 62% of the prior advance. A move below the January low (87.51) would confirm the rising flag as bearish and significantly increase the odds of a support break at 85, which would in turn confirm the head and shoulders pattern.
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