Is a Head and Shoulders Top Forming on the Dow?

George Brooks |

Is a Head and Shoulders Top Forming on the Dow?Investor’s first read      - Brooksie’s edge before the open

Friday, April 20, 2012        9:08 a.m. ET

DJIA: 12,964.10

S&P 500:   1376.82

Nasdaq Comp.: 3,007.56

Russell 2000: 798.90

So, how much weight do you give to a possible return of sovereign debt woes in Europe (Spain) -  to a slowing in the U.S. and global economies - to future earnings and to the seasonal tendency of stocks to flatten out and decline between May and November  ?

Get it right and you will be on the right side of the market’s next major move.

Europe’s woes will return to center stage. As the fourth largest economy among 16 other euro-area countries, Spain’s problems  must be taken seriously. On the other hand, Europe should be in better shape to deal with its problems this time around.

Without a doubt, the economy is not growing at a rapid pace, but we have been here before and this is characteristic of recoveries that follow severe recessions.

Earnings year-ago quarters will get tougher to beat for corporations going forward without an acceleration in economic growth.

And with the S&P 500 up 19% since Nov. 25 (28% since Oct. 4), the “Best Six Months” * for owning stocks (Nov.1 to May 1) may have run its course in a week or two.

All four suggest investors lighten up, raise some cash.

A late day rally spared the market a much bigger loss yesterday as the market reacted negatively to disappointing economic reports for Jobless Claims, Existing Home Sales and the Philly Fed economic report.  The only bright spot among yesterday’s reports was the Leading Indicators report for March but that came in at only a plus 0.3%  gain  after a 0.7% gain in February. Projections ranged from a gain of 0.2% to 0.5%.

What really matters is what the BIG money is seeing.  Their selling will stifle rallies as they appear to be breaking out for a run. Their lack of buying on dips will allow stocks to slide when they would normally rally.

I think that is what is playing out here and now.

HEAD & SHOULDERS TOP?

It’s called that because the pattern of prices looks just like a head on top of two shoulders.

In coming weeks, technicians will be referring to the possibility the market is forming a “Head & Shoulders” top. The left shoulder  developed in February and early March, the head in March and April, and  a right shoulder could be forming  now.

A break below DJIA 12,690 (S&P 500: 1357) raises the likelihood we are seeing a top.  A break above DJIA 13,316 (S&P 500:1422) suggests it was a fake-out.

Should this be a Head & Shoulders Top, the expected decline would be to DJIA 12,150 (S&P 500: 1290).

In bull markets, these formations can be fake-outs like the one between November 2009 and September 2010.  Presently, the “right shoulder” needs more work. I am skeptical !

TODAY: Rally will find resistance starting at DJIA 13,048 (S&P 500: 1387).  Bulls may be able to punch through.

ECONOMIC REPORTS:

With concern for health  the U.S. economic expansion mounting after a disappointing April 6 Employment Situation report, the Street will be looking for reassurance that the economy is still improving.  This week will shed light on that.

MONDAY:   

Retail Sales (8:30) rose 0.8% in March three times the economist’s 0.3% estimate following a strong 1.0% in February after a gain of 0.6% in January. Eleven of 13 categories posted increases.

Empire State Manufacturing Survey (8:30)  The pace of growth in the New York area’s manufacturing slowed in April to 6.6 from 20.2, following  a 5- month, 19,4 point run since November.

Business Inventories (10a.m.) Rose 0.7% in January, inventory-to-sales ratio remained at 1.27.

Housing Market Index (10a.m.) A survey by the NAHB which rates the economy and housing market conditions, including current home sales, new home sales, projected sales and traffic of prospective buyers.

:30) Rose a strong 1.1% in February after a gain of 0.6% in January

Empire State Manufacturing Survey (8:30) Strength in inventories bumped the index ahead  3.5% in March.

Business Inventories (10a.m.) Rose 0.6% in February following an increase of 0.8% in January, inventory-to-sales ratio remained at 1.27.

Housing Market Index (10a.m.) A survey by the NAHB which rates the economy and housing market conditions, including current home sales, new home sales, projected sales and traffic of prospective buyers. April’s Housing Market Index  dropped to 25 from 28 in March. A Bloomberg survey for the index of 48 economists ranged between 27 and 30.

TUESDAY:

Housing Starts (8:30) Dropped 1.1% in February after a 3.7% gain in January. Permits rose 5.1% after a 1.6% gain in January.

Industrial Production (9:15) Was flat in February due to a drop in mining. Manufacturing rose 0.3% after a jump of 1,1% in January.

THURSDAY:

Jobless Claims (8:30) Rose 13,000 in the April 7 week to 380,000 Four-week moving average was  up 4,250 to 368,5000.

Existing Home Sales (10 a.m.) declined 2.5% to an annual rate of 3.97 million. At its peak in 2005, sales of existing homes sold at an annual rate of 7.1 million homes.  The median price of an existing home firmed a bit with a gain of 2.5% to 163,000.

Philly Fed Survey (10a.m.) measures general business conditions in the Philadelphia region. The index declined to 8.5 from 12.5% in March when it jumped up from 10.2 homes.

Leading Indicators (10a.m.)  Leading Indicators rose 0.3% in March after a gain of  0.7% in February with the help of improving jobless claims. Also contributing were the interest rate spread (Fed Fds/10 yr treasury rate), stock prices and building permits.

George  Brooks

*Stock Trader’s Almanac.  You should not be without this statistical  gem and reservoir of investing savvy. Got my first issue in 1968 and every one since.

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The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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