Long NMSAX at 16.96, sold at 17.84

NMSAX is a mutual fund that tracks the S&P SmallCap 600 Index. IJR is an ETF that tracks the same index.  For this analysis, I am going to use IJR as a proxy for NMSAX.

The weekly chart shows an up trendline that was broken in early June. It also show a resistance line at 65 that was broken in November 2010, and should now act as support.  MACD suggests that the momentum of the rally that started in September 2010 is waning and that this market looks like it has started rolling over - on the weekly scale.

The daily chart shows two divergences between price and MACD, one in early 2011 and the other in April, marked by the red lines. It also shows a intermediate trendline, only slightly tilted upwards (green line). It also shows a peak in February followed by a taller one at the end of April.

These features are suggestive of a possible head and shoulder pattern, described by the grey lines. The green support line would be the neckline.

The bars in the MACD-Histogram of the last four days indicate a shrinking distance between the two moving averages, which typically precedes a crossing of the red signal line over the black MACD line. Also, MACD is at an extremely low level, not since since last September. These signs point to a possible move upward in the next few weeks, followed by a decline that should eventually break below the neckline, to complete the head and shoulder pattern.

Volume has been low in the February peak, a during the leg up of the "head", but has picked up during the leg down. It also spiked considerably in mid-March, at the neckline between the hypothetical left shoulder and  head. These readings are consistent with a head and shoulder pattern.

Now, if all of this is correct, this market should move up to about 74 in the next three to four weeks, or maybe longer. It should NOT move substantially below the green support line.  In fact, a drop below 68 would probably not stop until the next support at 64 (intermediate term) or 65 (long term).

I took the first bite on June 10, when the close was 69.04.  I took the second bite on June 15, when the close was 69.34.

A close below the green support line is my stop. My target is the first close above 72.5.

UPDATED ON June 29, 2011

Sold after IJR closed at 72.50, which resulted in NMSAX at 17.84.  I probably sold too soon, and I knew it, but I wanted to follow my plan and not enter any risky situation. All indicators are overbought, although they are not flashing sell signals yet, but we have reached the height of the left shoulder, and the cross pattern is sometimes negative.

Percentage gain: 4.78%.