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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

5 Big Stocks to Trade This Earnings Season

Stocks in this article: V KO ENB PX BRK.B BRK.A

Coca Cola

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.

>>9 Dow Dividend Stocks With A+ Buy Ratings

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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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.

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