Dow and S&P 500 Formations

Two Head and Shoulders

By Bryan Bottarelli
Monday, July 06, 2009 3:17 PM EDT
Mon, 6 Jul 2009 19:17:00 GMT

Dear Bottarelli Research Member,

We’ve spent more time recently studying the S&P 500 chart, so let’s take a step back and look at the current status of the Dow. As you can see below, the Blue Chips are showing a similar Head and Shoulders pattern as the S&P 500. In fact, this morning’s dip pushed the Dow below the neckline support. If we see this level break down on high volume, then this would technically confirm that the Head and Shoulders formation is in play. Therefore, let’s maintain our downside bias going into tomorrow.

INDU

At the same time, I’d like to follow up on my earlier comments on the oil plays. As you know, oil prices have come down hard lately, which has pushed the OIH from $115.00 down to $90.00 in less than a month. This morning, I noted that the OIH could be resting at the support level, as shown by the daily chart below.

OIH

But a look at the weekly OIH chart tells a different story. As you can see, the OIH (on a weekly basis) has hit serious resistance at the 50-day moving average. Therefore, if oil prices continue to fall, the OIH has more room to move down. So going forward, if commodities remain weak, it might be time to add DO, RIG, or OIH puts.

OIH

Ideally, we would play puts for a continuation momentum trade to the downside, and then quickly reverse course by locking in our put profits and moving into calls just ahead of any reversal. As always, I’ll tell you exactly when it’s time to strike. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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