The sole bearish setup we're looking at today is Coca Cola (KO). Yes, Coke has been trending higher for all of 2012, but along the way it's been forming a well known reversal pattern: the head and shoulders. Essentially, the head and shoulders pattern is formed by three swing highs in a stock. The outside two, the shoulders, come in at approximately the same level, and they're separated by the head, a higher peak in the pattern.
The head and shoulders indicates exhaustion among buyers, and tends to be a very reliable setup in spite of (or maybe because of) its popularity: a recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in "profits [that] would have been both statistically and economically significant."That doesn't mean that Coca Cola is going straight down from here. The pattern's trigger is a move through its neckline, the trend line that's connected the bottom of the pattern. Until the neckline gets broken, Coke's uptrend remains in force. If a break does happen, I'd recommend shorts keep a tight stop just above the right shoulder; next week's earnings could be the catalyst for the move. To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr. -- Written by Jonas Elmerraji in Baltimore.
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