We just noted a bearish setup in DIA that has yet to be validated. Well here’s a bearish setup in another major indice, QQQ, that is valid and in play.

QQQ has formed a head & shoulders pattern (gray ovals) over the past two months. Yesterday is broke below neckline support (blue line), which validates this pattern. The measured move (pink rectangle) takes QQQ to 65.50, which puts it on on 1-year support (purple line).

We missed the initial break, but will be watching for a retracement to the 68.00 price area to short into.  An AAPL retracement to 660 as mentioned in this article would certainly help that cause.

All in all the indices are noting continued bearish price action, but we are expecting a few upside days which will present excellent bearish strategy entry opportunities.

We see three cases for AAPL based on the chart above (click to enlarge)…

Best Case: AAPL bottomed with today’s low of 623.55

Middle Case: AAPL will retrace to 650-660, then complete the head & shoulders (gray ovals) measured move which takes the stock to 600.

Worst Case: AAPL will complete the measured move pertaining to the 1-year uptrend. The pink rectangle represents the point at which AAPL was furthest away from the uptrend. The height at that point was 175 (640-465). A 175 point downside move from the 650 uptrend break price would take the stock down to approximately 475. 

We think the middle case scenario is most likely, but as you know anything can happen. We are looking for a retracement to 660 in AAPL, at which point we would certainly put on a bearish options strategy.

(click image to enlarge)

1-year uptrend support break + head & shoulders neckline support break could mean AAPL 600 very soon.

It’s been a while since we’ve seen a Head & Shoulders formation as perfect as the one that’s currently on the BRCM 1-year chart.  The height of the pattern is approximately five points with a flat neckline at 34.00.  This translates to a measured move in the 29-30 range if this pattern comes to fruition.

BRCM will need two consecutive closes below neckline support at 34.00 before we get too excited, but it’s certainly shaping up nicely.  Today will make two consecutive closes below 200 day SMA, which may give it fuel to the downside.  Today’s break below 34.00 looked promising for bearish positioning, but it is rallying into the close which diminishes the validity of the neckline break. 

We’re keeping a close eye on BRCM and fully intend to send Premier Members a trade alert on the stock if we get the confirmation mentioned above. 

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click image to enlarge

There is a Head & Shoulders pattern in the works on S&P 500 emini futures (/ES).  Note the three grey ovals representing the left shoulder, head, and right shoulder.  The up sloping purple line represents the neckline support of this pattern, which is being tested as we speak.  The blue rectangle measures the move from the top of the head to the neckline directly below, then we duplicate that move assuming a neckline break some time this week to show the measured move if this formation comes to fruition.  In the end, the green oval indicates a measures move in the 1275-1290 range, which takes it back to previous resistance turned support as well as the 200 day simple moving average support. 

Makes a lot of sense, and we intend to position bearish if the neckline support breaks in the coming days.

$NG_F: Time to Let Gas Go?

We’ve talked about Natural Gas Futures (/NG) several times on this blog, most from a support perspective.  While strong support still exists in this range, especially at the 3.75 area (purple line), we have noted a potential short term threat to this support range. 

A Head & Shoulders reversal pattern may indicate a swift downside move in Natty is on the horizon.  The left shoulder, head, and right shoulder are indicated via the white ovals in the picture.  The neckline is noted by the slightly angled yellow line.

Note how Natural Gas broke the neckline with a swift downside move, retraced to neckline ‘support turned resistance’ (yellow oval), and has since been fading lower.  This is a positive confirmation.

Head & Shoulders measured moves are calculated by subtracting the height of head-to-neckline from the price point at which neckline support breaks.  In this case, the head resides at 4.86 and neckline directly below the head is 4.06.  That’s a height of 0.80.  Subtract that from the neckline break point of approximately 4.13 and the measured move is 3.33 (green oval).

This would put Natural Gas at 52 week lows from late October 2010.  Being that we respect this potential price pattern, we have lightened up on our bullish UNG options spreads for a small profit and intend to bail on the rest for a small loss and convert to bearish positions if /NG breaks 3.80.  In the event /NG makes it all the way down to the 3.30 range, we will take profits on the bearish positions and begin going heavily bullish on it.  We’re talking mortgage the house heavy!!