Head-and-Shoulders Top Has Traders Concerned

by Sam Collins | April 30, 2014 2:25 am

Positive earnings from several Dow components and a push from the energy sector Tuesday resulted in a positive day for the broad market. The S&P 500 and Dow rose 0.5%, while the Nasdaq was up 0.7%.

A rebound in biotech and Internet stocks helped the Nasdaq take the lead. Thus far, the index has lost 2.3% in April compared with a 0.3% gain for the S&P 500.

With no new development in Ukraine, investors focused on earnings. Deutsche Bank (DB[1]), Merck (MRK[2]), Sprint (S[3]) and Valero Energy (VLO[4]) all reported better-than-expected earnings.

The Conference Board’s Consumer Confidence Index fell to 82.3 in April, while 83.5 was expected. And the S&P/Case-Shiller 20-city home price index for February rose 12.9% versus estimates of 13%.

At Tuesday’s close, the Dow Jones Industrial Average gained 87 points at 16,535, the S&P 500 rose 9 points to 1,878, and the Nasdaq was up 29 points at 4,104.

The NYSE reported total volume of 3.6 billion shares, and the Nasdaq crossed 1.9 billion. On the Big Board, advancers outpaced decliners by 1.5-to-1, and on the Nasdaq, advancers led by 1.2-to-1.

Nasdaq Chart
Click to Enlarge

Chart Key[5]

The potential of a head-and-shoulders top on both the Nasdaq and Russell 2000 has technically oriented traders and investors concerned. If the Nasdaq breaks the neckline at 4,000, then the target for a correction is easily calculated to be 3,629 (high of 4,371-4,000 = 371; 4,000-371= 3,629). But note the positive MACD and the poorly formed left and right shoulders.

However, the upward momentum is so weak that the index is having a difficult time challenging even the 20-day moving average.

Dow Chart
Click to Enlarge

On the Dow’s chart is a potential cup-and-handle formation. This pattern most often forms at important bottoms, and is thus considered a reversal indicator. Yet, it often appears in indices and individual stocks as a consolidation over a period of three or more months. The Dow is knocking on the door of a breakout and missed a new closing high by just 40 points.

Conclusion: These charts illustrate the clearest example of a bifurcated market that I’ve seen. This is why it is important not to jump the gun on either the bullish or bearish side.

Since we have an established bull market, with a Dow Theory buy signal close at hand, the advantage appears to be with the bulls. The Dow’s ability to hold support at its 50-day moving average for over two weeks is strong evidence of the bull’s power. But if that line was to break, the power could quickly shift to the bears. (The S&P 500’s major support line is at 1,850.)

The final outcome of a classic struggle between the bulls and bears will most likely occur as we enter May.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[6].

For a list of this week’s economic reports due out, click here[7].

  1. DB: http://studio-5.financialcontent.com/investplace/quote?Symbol=DB
  2. MRK: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRK
  3. S: http://studio-5.financialcontent.com/investplace/quote?Symbol=S
  4. VLO: http://studio-5.financialcontent.com/investplace/quote?Symbol=VLO
  5. [Image]: https://investorplace.com/wp-content/uploads/2013/05/chart-key.gif
  6. click here: http://www.bloomberg.com/apps/ecal?c=US
  7. click here: http://www.bloomberg.com/markets/economic-calendar/

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