Tuesday, May 8, 2012

Russell 2000 Breaks the Neckline of a Head-and-Shoulders Pattern (IWM)

The ETF is down 1.16% at $78.38.
From Schaeffer's Research May 7:
IWM Testing Neckline of Head & Shoulders Pattern
After Friday's sell-off following the worse-than-expected jobs report, the iShares Russell 2000 Index Fund (IWM) finds itself just above the neckline of the head-and-shoulders formation that we discussed last week. This pattern is also showing up on the Dow Jones Industrial Average (DJIA), which Tony Venosa discussed in detail recently.

The other interesting thing is that the neckline coincides with a 25% retracement of IWM's rally off the October 2011 low. So far, this former support area is holding up well. Remember, the sell signal for this head-and-shoulders pattern isn't triggered until the neckline is actually broken. In addition, some traders even like to wait for a rally back to the former neckline after the break below before they short a security.
Some of the traders here have definitely been hearing more and more people talking about this formation, although we haven't seen it discussed widely on the major TV networks or in the mainstream media yet. As we mentioned in previous blogs, if this formation starts to get too much attention, it can actually be a good contrarian play to potentially go long.
IWM price chart
Chart courtesy of StockCharts.com