Ut oh... This looks all too familiar

The market has shown some resiliency in the face of all kinds of bad news during the last few months, but there is growing nervousness about the economy's prospects as both companies and consumers alike continue to suffer from the recession.

Already faced with the unemployment rate rising, retailers are bracing for some more ugly sales numbers and the commercial real estate crisis shadow is growing and threatening to hit hard as it errupts into it's own ugly mess. Coming on the heels of the housing crisis, many think that could become the catalyst to a "double bottom" correction pattern which "must occur for us to finally start to recover fully."

Technical analysis gurus might argue that all of that stuff is noise, but they should have cause for concern as they look at the S&P500 chart today. During yesterday's session, a key support level was pierced and things aren't looking good.  Anxiety over the start of the earnings season has even dampened optimism.

Is that a newly formed "head and shoulders" pattern?

Will the market rally again or is it due for another correction?

The head and shoulders pattern is generally regarded as a strong reversal pattern and it is most often seen in uptrends.

It is also most reliable when found in an uptrend as well. Eventually, the market begins to slow down and the forces of supply and demand are generally considered in balance.  Sellers come in at the highs (left shoulder) and the downside is probed (beginning neckline.)  Buyers soon return to the market and ultimately push through to new highs (head.) However, the new highs are quickly turned back and the downside is tested again (continuing neckline.)  Tentative buying re-emerges and the market rallies once more, but fails to take out the previous high. (This last top is considered the right shoulder.)  Buying dries up and the market tests the downside yet again. Your trendline for this pattern should be drawn from the beginning neckline to the continuing neckline.  (Volume has a greater importance in the head and shoulders pattern in comparison to other patterns.  Volume generally follows the price higher on the left shoulder. However, the head is formed on diminished volume indicating the buyers aren't as aggressive as they once were.  And on the last rallying attempt-the left shoulder-volume is even lighter than on the head, signaling that the buyers may have exhausted themselves.) 

New selling comes in and previous buyers get out.  The pattern is complete when the market breaks the neckline. We will have confirmation of that broken neckline soon and keep our fingers crossed.

If there is a downward move coming, then the extent of the breakout move can be estimated by measuring from the top of the middle peak down to the neckline. This targetcan usually be projected downwards from the point of breakout.

Keep your eyes on the trading action short term.

The good news is that this site was launched after some of us realized that the biomedical sector showed great resolve as the rest of the market was falling apart.

The founders of this site looked at their own portfolios last year and realized that most of their biggest trades developed successfully thanks to being informed about biotech. That means having good, reliable information about not only good up-and-coming companies, but also arming yourself with knowledge of important catalyst events- like upcoming FDA decisions and approvals- which undoubtedly have an impact on the price of shares.

Where some sectors have been flat, biotech has had volatility. Market analysis and knowledge about the science of this sector is key to decoding the signs this sector gives us.  Our job is to continue to provide you all of those things because all of those tools can provide you with critical "smarts" that will help you make money - even in down markets.

A very sound, analytical approach to successful biotech investing is within reach, but one must actively conduct research and have access to the right tools.

Stay tuned.

Things may be about to get even more interesting, but if you're going to trade biotech stocks give yourself a pat on the back. You're in the right place!

Special Thanks To: incrediblecharts.com and chartpatterns.com

BiomedReports is not paid or compensated to report news and developments about publicly traded companies. Full disclosure can be read in the About Us Section

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