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Swing traders should recognize this 2001 setup in Alkermes from their favorite technical analysis books. It's a classic head-and-shoulders pattern, and it fits all the rules. It has well-formed left and right shoulders at the same height. The neckline descends modestly in a straight line. And each rally shows less commitment by buyers. So the stock appears to be a prime target for short- selling.

In a classic head-and-shoulders setup, we expect a stock to break the neckline and fall a distance equal to the height of the head (middle high). This targets a decline to around $20 for Alkermes. But we have no guarantee the target will be reached, so the setup works best with a trailing stop. This way we can grab a profit but reduce damage from an unexpected short squeeze.

The Alkermes' chart looks bearish for other reasons as well. The November 2001 high failed at the 200-day moving average. And the selloff on the last bar failed the 50-day moving average. So when do we jump in with our short sale?

Unfortunately, it’s still not the best time to sell this stock short. The 60-minute overbought- oversold oscillator (Stochastics) cautions that price could bounce before breaking the neckline. In fact, a weak rally would present a better entry point for two reasons. First, that move would run into triple resistance: the broken 50-day moving average, three short-term lows and a market number of $25. Second, Stochastics would then be rolling over from an overbought condition, lowering the odds of a short squeeze

The classic head-and-shoulders trade sells short on a neckline break or the first pullback to resistance, if the opportunity arises. But this classic pattern is so well-known that common entry levels can generate substantial whipsaws. Contrarians like to trade against head-and-shoulders short-sellers and implement a variety of shakeouts to force them to cover positions.

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