Option Investor
Market Updates

Head and Shoulders

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I received an e-mail from a subscriber about a possible head and shoulders pattern in the Semiconductor Index (SOX.X). After removing all my retracements, moving averages, trendlines, etc., there it was.

Semiconductor Index (SOX.X) Chart - daily

This reminded me how easy it is to clutter a chart with so many indicators that you miss the big picture. Granted you should use whatever indicators you have become comfortable with, but there is a certain truth in Henry David Thoreau's, "Simplicity. Simplicity. Simplicity." Especially if I'm on a losing streak I'll get back to basics to clear my head. With that said, looking at this pattern frightens me. If this is in fact a head and shoulders continuation pattern, the break of the neckline would suggest a drop to around 290. Yikes. I had to recheck my calculation. Top of the head minus the neckline, 763-525 = 238. Subtract that from the neckline (525-238) and you get 287. The SOX was at 1362 on 3/12/00! I can't fathom a drop 238, but if numbers don't lie? At least the SOX is head and shoulders above the other sectors today, up 9%, and stemming any short-term break of the neckline.

In other news, the Dow is trying to manage a small rally. Monitor any short positions and adjust stops accordingly.

Jeffrey Canavan
Assistant Analyst

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