At the end of last week, I discussed Apple (AAPL) and the potential head and shoulders bottoming pattern that nearly everyone seems to be watching. AAPL has yet to make a strong, definitive move, so I’d keep watching this pattern develop in the meantime. On another note, I also discussed (on Tuesday) a few things to watch for during this shortened week–one thing to watch was the rotation out of the higher yielding, dividend paying names (such as Utilities) and into the more cyclical sectors (i.e. Energy and Industrials). This week, we have had a nasty sell-off in Utilities. Below is the performance for the nine major sectors over the past week. All of this data is as of the close on 5/30/13.
In hindsight, the chart for Utilities (XLU) may have represented a classic “head and shoulders” topping pattern. Take a look at the below chart. You can see where I have marked the left shoulder, head, right shoulder, and neckline. Strong volume (in this case, selling volume) needs to confirm the bearishness of these patterns. You can definitely see huge signs of distribution as the pattern was nearing its completion of the head and right shoulder.
As with all patterns, we needed to see some follow-through, and a strong break of the neckline completed with a “measured” move. In this case, the top of the head is at roughly ~41.50, and the neckline is placed right around ~40. This length of 1.50 should represent a “measured” move to around 38.50. Remember, nothing is ever exact with these patterns. Use them as rough guidelines.
The final chart shows the strong, sharp sell-off in Utilities. Note the even more bearish selling volume. This is a major sign of distribution (likely institutional selling), and this violent selling volume contributed to the not-so-orderly sell-off within this sector. I’d continue to be on the lookout for these major topping patterns, especially on some of the more overbought sectors.
Good luck out there.