Tim Knight turns beairsh on R2K (IWM)

This morning Tim Knight posted this beautiful chart over at his blog and announced he has begun accumulating Russell 2000 (IWM) puts. You may recall my note of the completion of that highlighed H&S pattern pecicely one year ago. Its interesting how times change so quickly. Anyways, Tim usually has great timing so be on your toes!

Disclosure: I own IWM puts

Long Term Head & Shoulders Top on IWM

This pattern looks somewhat similar to the head & shoulders top (H&S) I saw on the Dow Jones a few weeks back and the scale of it is similarly disturbing. The Russel 2000 (IWM etf) has recently been carving out what looks like a perfect right shoulder, completing a H&S that has been in the making for over two and a half years. Using a neckline at roughly $66 and a peak near $86 you get a price objective thats $20 lower. Thats a 30% drop from here which would be 47% drop from the all time high. This is where even the most confident technical trader takes a step back and questions the validity of the target. What economic conditions would lead to a 50% drop in the value of US small businesses? What effect would such a huge destruction of wealth (stock value) have on the US economy? It sounds like a doomsday scenario. You can be more conservative and some technicians, see Bulkowski, modify this objective (from the measure rule) by including his statistical performance. Bulkowski found that 55% of H&S patterns meet their price target so we multiply the move by .55. His target would then be 66 - .55(20) = $55 so even the most conservative analysis will give you a price objective far below current prices should IWM break the neckline. It should be noted that Bulkoski's statistics rank the H&S top as the #1 pattern based on performance, so its a reliable pattern.

On a side note, I think its very interesting that there is a more appropriately sized H&S top at the very peak within the head of the long term H&S. Furthermore, you also see a H&S top at the peak of the right shoulder. These are patterns within a pattern, self similarity! Its really a thing of cataclysmic beauty.

Self Similarity in SIRF

I love it when I see a pattern like this in a chart. Check out the CCI back in Feb and March on SIRF which has been in a steady downtrend all year long. The pattern looks very similar to the one formed over the last two months. If the pattern unfolds in the same way SIRF could fall by 1/4 in the next few months and easily break recent lows.

SIRF's 50 dma has acted like resistance the whole way down from $34 and may have just stopped this swing at $20. The next level of resistance would be near $22 where puts would be very attractive to me. If SIRF broke that red line connecting the highs I would bail, but otherwise anywhere in here looks safe.

Back in early April when the previous pattern completed, SIRF hovered below the 50 dma for a few weeks but never moved above. It then gapped down on earnings and has been below its 200 dma ever since.

Note, technically this is not self similarity because the size magnitudes of the patterns are the same here. In a true self similar stock pattern the 5 min time scale might look the same as the daily time scale. I think the phrase might still apply here somewhat though.