The graph of discretionary spending (XLE) below shows a head and shoulders formation. This is a reversal formation (but there is no guarantee this will complete). To determine the "target" for completion of this pattern follow these steps:
1) Find the difference between the top of the head (here = 34.97, I will call it 35) and the neckline below it (=32.5). The difference is 2.5.
2) Subtract the difference of 2.5 from the right end of the neckline (=33 in the graph). This gives a downside target of 30.5.
This target implies that discretationary spending will test its late April low, which was almost identical to the current target value.
How likely is this to occur? Add support and resistance lines and over the next week or so, track whether a breakout above resistance occurs. That would imply the likelihood that the pattern will fail to complete.
Also, look at the two circled areas in the graph. What do these indicate. More importantly, note that the dramatic declines in the past few days have occurred with very large volume. That is usually consistent with more downside ahead.
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