INTRODUCTION.
This week a rumor began to circulate about the possibility that the IPC is forming a technical figure called shoulder head shoulder (SHS).
In my opinion, given current conditions, it is unlikely that this figure will be formed.
IMPLICATIONS OF THIS FIGURE
According to the next graph, a lower IPC would enable the 25.900 points. Level not touched since July 20, 2009.
FUNDAMENTAL ASPECTS.
a) Mexico's economy is closely linked to the U.S. economy, the country's recovery depends on the U.S. recovery. So that the IPC and DJI motions are closely linked. This means that the same formation should be seen in the DJI or S&P 500. So that both markets should seek the same low level. There is no reason for a detached of both markets.
b) The figure (SHS) predicts a low very dramatic and relatively quick. Reflect of a very weak market or in conditions of wear sustained. In other words fundamentals deteriorate quickly. While the Mexican economy is not an example of strength, it is not rapidly deteriorating. The Mexican economy is what it is:
- The worst performance in Latin America and one of the worst of the Emerging Countries, but now both groups are, globally, the most economically dynamic (some say growth drivers).
- A poorly managed economy, without development, with increasingly poor, increasingly unequal distribution of wealth, increasing debt, etc. however, with stable macroeconomic numbers and with ability to pay its commitments.
- Summarizing, the economy is bad, but just as bad as last year and the year before and the previous administration. And just as badly as expected to be the coming year. No extra mess (just the usual prejudice). Under these circumstances and in this environment (and U.S. dependence on) the Bolsa Mexicana de Valores (IPC) has managed to grow and, for the moment, has no reason to change.
TECHNICAL ASPECTS
a) What is a shoulder head shoulder: is a technical formation that is characterized by three peaks, where the intermediate peak is higher than the other two. The first and third are about the same height. (See figure: SHS ideal)
It has three phases:
1. First phase (shoulder one). The price increases accompanied by a volume increase, higher than average, then decrease the price to the original support level (also decreases the volume).
2. Second stage (head). Price increases to a maximum above that achieved in the shoulder one. The volume is slightly smaller than in shoulder one. Then the price decreases to the support level (this level is called the neckline) and the volume also decrease.
3. Third phase (shoulder 2). The price increases to about the same level of shoulder one maximum. The volume is slightly smaller than in the head. The price goes back to the support level and the volume decrease.
4. Rupture. Once the support is reached, it should be broken with a significant volume. This confirms break-up and change in tendency. Once validated the break is not surprising that there is a pullback
5. Objective. This break enabled, in the short term, a low price equal to the distance between the support and the head maximum.
b) What happens. It is a formation of weakness:
1. The price begins to increase with volume. But doesn't have the strength to keep up and returns to its support.
2. The price start to rise again and reaches a new high, but the volume does not follow. Loses strength and returns to its support.
3. Again try it again but neither the price nor the volume reaching the previous maximums. Loses strength and returns to the support.
4. When reach the support, volume should increases to achieve the force necessary to break a support that has been tested three times. When the support is broken, it becomes a great resistance.
5. After four signs of weakness the price fall is fast.
c) The IPC, the Dow Jones Industrials 30 and the S&P 500 show the first shoulder and the head. But not perfectly formed.
d) Neither the IPC nor the Dow Jones shows the correct formations in the volume, that give validity to figure. The volume is very important to validate the formation. In this sense there are many flaws. (The S&P 500 does not provide volume data).
IPC and flaws in the volume.
Dow Jones Industrials 30 and the flaws in the volume.
S&P 500 and training.
Note that both the IPC and in the DJI volume increases significantly when they touche the support and not when they reach the maximum.
SCENARIOS
a) The market takes upward and away from training. Unlikely.
b) Lateral market, re-test the support and resist. The most probable.
c) Complete the figure in price and pursues its low objective. The least probable.
d) Complete the figure in price and break down, but do not reach the low objective. Unlikely.
CONCLUSION
- If the fundamental conditions remain unchanged. I do not consider likely to complete training.
- The volume gives more strength to the support (IPC support in 30,000) than the shoulder-head-shoulder training.
- There are many flaws in the formation of the volume to give validity to training.
Technical Analysis Mexico Stock Exchange DJI Shoulder Head Shoulder IPC
