Watch GOOG, AAPL and QQQQ, here's why

When looking for potential swing trades, the head and shoulders reversal formation is one of my favorites. The basics of the head and shoulders formation is that it is an indication that the current trend is about to reverse.

For a current example, let's take a look at (IBM | Quote | Chart | News | PowerRating):

Notice how IBM has put together a decent move to the upside over the past 9 months, but has started to falter in the last month or so. Even more telling is the head and shoulders formation as outlined below.

Now take a look at the 9 month charts of (GOOG | Quote | Chart | News | PowerRating), (AAPL | Quote | Chart | News | PowerRating), and (QQQQ | Quote | Chart | News | PowerRating). It's still early, but these stocks may be starting into the 2nd shoulder of their own formations, and that's definitely worth keeping an eye on.

Here's how to play this for a high profit potential swing trade:

Watch 81.00-81.30 as a support level for the stock. This is the "neckline", the support level where both shoulders and the head of the formation have been built off of (and returned back to). The key for every head and shoulders formation is the break of the neckline. Until that occurs, the formation is simply a red flag that something bad might be about to happen.

If IBM can breakdown under the neckline on decent volume, look for short selling opportunities on any low-volume retracements back to the 81.00 area. Remember, once a support level is broken it is very likely to provide resistance--and that can be very helpful to shorts who take advantage of this formation.

Note that the head and shoulders formation is an indicator on any time-frame of chart, so feel free to use it for day trading or even options trading!

Andy Swan

Andy Swan created and co-founded DaytradeTeam five years ago on a principle of empowering individual stock and options traders with the techniques and analysis methods typically reserved for elite professionals. His expertise in technical analysis and commitment to educating members earned DaytradeTeam a top-ranking among advisory services for several years.