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Back on the 17th we initially brought to the light the possibility of a ‘head-and-shoulders’ top, but at that time we still needed a couple of things to happen before we could give it the green light. Since then the ‘right shoulder’ has been put into place and a daily close below the ‘neckline’ occurred yesterday in the wake of a dovish ECB. It’s now become one of the most popular technical themes in the market-place, which can give pause to the idea that the pattern will result in the decline it implicates will happen. But we can only take set-ups as they are presented, manage risk, and if it works it works, if it doesn’t it doesn’t. That’s trading…
A couple of approaches can be taken here depending on your style. For swing-traders, the daily close below the ‘neckline’ was the official signal. Looking to a target, we can derive a ‘measured move target’ by subtracting the height of the H&S pattern from its ‘neckline’. This method, based on symmetry, provides an end-target of around 11240. There is support along the way at 11429, 11366, 11296, & 200-day MA. Those could be used to scale out of positions or as reference points from which to trade around a core holding.
For the shorter-term minded trader (1-5 days), then using the broader breakdown as a signal of the path of least resistance helps mold future set-ups which may occur on the daily time-frame on down (i.e. 1-hr, 4-hr).
Looking for an invalidation point brings the ‘trigger candle’ and trend-line running down off the September high into focus. A push beyond those points of resistance would bring caution for shorts. More backing-and-filling without momentum could always bring a bull-flag into play, but, again, we’ll operate off of what is in front of us now and go from there.
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Entry: At market or first bounce
Targets: 11240, with 11429, 11366, 11296, & 200-day MA as support along the way