A further step towards Head-and-Shoulder formation (2010-12-13 HSI analysis)

Last week was a quiet week, nothing important happened. HSI opened at 23,507 on Monday and closed at 23,162 on Friday. However, the index is in progress of forming head-and-shoulder pattern.
Daily chart of HSI:


We can see that the third peak has formed. The red neckline would be the next support level, which is at around 22,750. It would be a very critical level. As suggested by the head-and-shoulder pattern, if the index breaks the supporting neckline, it would drop as much as the distance between the neckline and the highest peak; hence, HSI could drop to as low as around 20,600 estimated by the pattern.

It would mean a 10% drop in index which is definitely very serious. Though MACD has been falling, it is still around zero now. This would not be a vital power supporting the index.

Weekly chart of HSI:


The index has moved a step towards the red uptrend line. This line is a support, which tells us that there might be a support at around 22,500. The shrinking volume and bearish cross of MACD and EMA give bad signals about HSI.

Combining both charts, if the index this week drops through 22,700, we don't have to make decision on whether to sell everything or short-sell stocks too quickly, as there will be a support at 22,500. It is possible for the index to have false breakdown. If the index drops below 22,500 at close of this week, then it would be a really really bad signal. We can then decide how to make profits on the coming bearish waves.