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ARCHIVE:    JUNE 1999-JULY 2000  

An InvestorLinks article
distributed every market day.

MRV Communications  (NASDAQ: MRVC)
Market Call™ for July 11, 2000
Contributed by Mark Seleznov, TrendTrader.com.

The purpose of this Market Call section is to educate readers in technical analysis patterns and indicators. As with all investment information, you need to research information and consult your financial advisor before initiating any strategies that are contained in Market Call.

Also, you must realize that as with all trading strategies, opinions can change quickly depending on market conditions and developments.

This column tries to present historical examples, potential set ups, and examples of entry and exit strategies.

The Head and Shoulders Pattern

The head and shoulders pattern is generally regarded as a reversal pattern and it is most often seen in uptrends. It is also most reliable when found in an uptrend as well. Eventually, the market begins to slow down and the forces of supply and demand are generally considered in balance. Sellers come in at the highs (left shoulder) and the downside is probed (beginning neckline.) Buyers soon return to the market and ultimately push through to new highs (head.) However, the new highs are quickly turned back and the downside is tested again (continuing neckline.) Tentative buying re-emerges and the market rallies once more, but fails to take out the previous high. (This last top is considered the right shoulder.) Buying dries up and the market tests the downside yet again.

Your trendline for this pattern should be drawn from the beginning neckline to the continuing neckline. (Volume has a greater importance in the head and shoulders pattern in comparison to other patterns. Volume generally follows the price higher on the left shoulder. However, the head is formed on diminished volume indicating the buyers aren't as aggressive as they once were. And on the last rallying attempt-the left shoulder-volume is even lighter than on the head, signaling that the buyers may have exhausted themselves.) New selling comes in and previous buyers get out. The pattern is complete when the market breaks the neckline. (Volume should increase on the breakout.)

A reverse Head and Shoulder formation occurs with a mirror formation with the head the low and the shoulders the higher highs on both sides. Reverse Head and Shoulder Patterns are Bullish.

This pattern can be used on charts of various time frames from minutes to daily or even weekly charts. Our charts are 60 minute charts.

Let’s look at a Reverse Head and Shoulders in MRV Communications, MRVC.

A Reverse Head and Shoulders Pattern:

A major reversal pattern with four distinct features:

Left Shoulder:

This would be the time that MRVC had in the late June time frame.

Head:

This is the drop in price on July 6, 2000.

Right Shoulder:

The rally of July 7 and today July 10, 2000.

Neckline:

This would be drawn across the resistance at 70.

On Monday, MRVC opened up and moved toward the neckline all day. I expect MRVC to continue to rally and if it takes out the neckline at 70 3/8 in the morning, I would Buy this Head and Shoulders pattern.

The Buy would be on a Buy stop at 70 3/8.

If filled, I would place a stop at 67 �.

Do not Buy the stock unless it breaks the neckline at 70 3/8.

Chart courtesy of
 


Interested in adding Market Call to your website?
Click here for details: Market Call Information

Mark A. Seleznov is a General Securities Principal and Managing Partner of Trend Trader, LLC, a NASD, SIPC broker/dealer firm located in Scottsdale, Arizona. A professional trader for over 25 years, Mark was a Market Maker on the Philadelphia Stock Exchange, a Retail Registered Representative, and futures trader. Mark is an author and recognized expert in equity Day Trading. He conducts seminars in Equity Day Trading and offers his firm traders training and support. If his firm holds any positions in the public companies he writes about, it will be noted at the bottom of his article.

Market Calls is a daily syndicated column on trading by Mark A. Seleznov, Managing Partner of Trend Trader, LLC. For information on obtaining Market Calls for your web site, newspapers, or publication, contact
Trend Trader, LLC at 602-948-1146

Disclaimer: Trading in securities may not be suitable for all individuals. Consult your broker or other professional to determine your suitability. This is not an offer to buy or sell securities. The advice given above is of a general nature and should not be taken as a recommendation to buy or sell the referenced security.

 
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Last modified: March 17, 2001

Published By Tulips and Bears LLC