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A Painful Head and Shoulder is Lurking for Merck & Company

09/26/02 10:26:32 AM
by Andrew Hetherington

A head and shoulders pattern with diminishing volume signals a shorting opportunity.

Security:   MRK
Position:   N/A

Figure 1: Daily chart of Merck & Co. (MRK).

The daily chart for Merck & Company (MRK) illustrates the pain to come. We have a 2-month head and shoulders pattern with perfectly diminished volume on the creation of the pattern. Playing a short off the top of the intermediate trendline was as sure a bet as there is in the equities markets. Taking a short position in the $50.00 area after the third fan line confirmation, was a given. On September 17 it pulled back to the fan line in the $49.65 area before making a one-day reversal with good volume. Although it was not extraordinary volume, it was an increase in recent activity that day with 6.4 million shares. The upsloping neckline was also broken on this short-term phenomenon and there was every reason to believe a downward move was likely. At this point the customary pullback to the line in the $47.50 areas is likely. This will be the optimum time to short it once again. Anticipating a downward move to the previous bottom of $38.50 seems inevitable. If things get really bad then it will even go lower, however, if it stalls at this support, buying back your short is the safest thing to do. Shorting is about discipline. Making small amounts often as opposed to the grand slam.

Figure 2: Weekly chart of Merck & Co.
Graphic provided by: SuperCharts.
In Figure 2 you can see the downward intermediate trend is still intact on the weekly chart. This trend will continue. The volume on the small head and shoulders is easier to view from this chart. It diminishes throughout the construction of the pattern. In addition, the 18-year long-term trend has been broken in the $62.00 areas.

Andrew Hetherington

Classic Dow Theorist who trades as a pure technician, using pattern recognition.

Toronto, Canada

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Date: 10/01/02Rank: 4Comment: 
Date: 10/01/02Rank: 3Comment: 
Date: 10/05/02Rank: 5Comment: Excellent Article. What free charting service/program would you recommend with decent amount of indicators? Thanks. Cheers,Padhu

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