Friday, July 29, 2016

Tech Talk: The Inverted Head and Shoulders Pattern


By Peter McKenzie-Brown

One of the most bullish stock formations is the inverted head and shoulder formation. It is a reversal pattern, which begins during a downtrend. This isn’t strictly true in the case of Telus, since the stock began to recover from a deep crash six years ago. Furthermore, volume did not move much as the right shoulder developed. Let those cautions guide your investment decision.

That said, this chart shows all the characteristics of this powerful formation, and the recent breakout represents an important mover upward from a slump the telecommunications stock has been in for a couple of years. Also, as an illustration the pattern is picture perfect.

As you can see, in this pattern sellers drove this stock down on high volume late last year, with confidence beginning to return at the beginning of this year. By March, investors began taking profits, thereby creating the beginnings of a right shoulder. The breakout, in my opinion, has just begun and could well sustain itself for a while.

According to some technicians, in some of these moves you can calculate the size of the upward move by measuring the distance from the neckline to the head. That, according to those folks, is the size of the prize you might expect. Personally, I see too much risk in that strategy. I intend to sell sooner.

In no way does this article represent a buy-or-sell recommendation, of course. Rather, what I recommend you do is look for this bullish pattern in your own portfolio.

Also, a word of caution: The mirror image of this image is the head and shoulders formation. Look for that, too. Unlike the bullish inverted H&S, the regular head and shoulder configuration is a bearish formation. If you see it, beware.
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