Head and Shoulders: the beginning of the bear-in-charge?

In addition to the technical indicators that are being used by chartists, studying chart patterns are also useful to spot trading opportunities or to take profit.

By studying and identifying the chart patterns, chartists will get some trading ideas, as well as a rough idea on how the stock will perform.

In this article, we will look at the “Head and Shoulders” pattern. Let’s begin with how this pattern is formed.

There are three (3) components to form a “Head and Shoulders” pattern:

  1. Left shoulder: stock price rises to a peak and subsequently declines,
  2. Head: the stock price rises above the left shoulder and again declines, and
  3. Right shoulder: finally, the stock price rises again, but not higher than the head, and declines once more.

In addition, there is a “Neckline” that is drawn through the lowest points of the two intervening troughs, where it acts like a support line.

The head and shoulders pattern is a major reversal formation. When a stock price breaks below the neckline, there is no longer any support and very rapid declines can occur.

Based on the chart above, the stock price has broken below the “neckline” during May. This is a strong sell signal.

From the observation, the stock price is turning down with increasing volume, which confirms a bearish outlook.

Not only has the stock price fallen below the “neckline”, but it also broke below the 200-day moving average, where the latter is frequently used as a long-term reference.

In addition, the 50-day moving average is heading downward, and if it crosses below the 200-day moving average, it’s called the “death crossover”. The long-term outlook is bearish.

The recent share price performance, as you may observe, a “gap down” occurred, which is also a bearish signal.

Based on the simple analysis as highlighted above, the market sentiment for the stock is not optimistic.

The current stock price is trading at RM1.61. If the existing price level is not sustained, the next support will be at RM1.53 to RM1.50 level.

In short, even though the share price has fallen from the peak of RM2.71 to current level at RM1.61, but the technical analysis study above is not showing any good sign.

Unless there is a reversal in trend and/or buying signals appear, it may then represent a buying opportunity. Otherwise, stay safe, and don’t catch a falling knife.