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HEAD & SHOULDERS


Pay Day At Paychex

07/25/07 08:34:28 AM
by Arthur Hill

Paychex formed a large inverse head & shoulders formation, and a high-volume break above neckline resistance signals a continuation of the long-term uptrend.

Security:   PAYX
Position:   Accumulate

Figure 1 shows weekly price data for Paychex (PAYX) over the last two years. The stock surged above 40 at the end of 2005 and then formed a large inverse head & shoulders over the last 18 months. This is a huge consolidation, with the left shoulder low in January 2006, the head low in August 2006, and the right shoulder low in April 2007. Neckline resistance sits at 42.5 and the stock broke resistance with a long white candlestick in early July.

FIGURE 1: PAYCHEX, WEEKLY. Here, you can see that the stock surged above 40 at the end of 2005 and then formed a large inverse head & shoulders pattern over the last 18 months.
Graphic provided by: MetaStock.
 
Volume is always important for bullish patterns, and strong upside volume validates the breakout. The surge above resistance occurred on above-average volume, and this shows strong buying pressure. In addition, the right shoulder advance occurred with above-average volume, and there is clearly some serious buying pressure behind the move. Volume is like fuel, and strong upside volume means there is plenty of fuel for further gains.

FIGURE 2: PAYCHEX, MONTHLY. Based on traditional technical analysis, the breakout target should be around 52.
Graphic provided by: MetaStock.
 
Based on traditional technical analysis, the breakout target is around 52. The height of the pattern is added to the breakout for a target. I have also extrapolated two other upside targets from the monthly chart (Figure 2). The second target is resistance from the 2000 high around 61 and the third target is based on a rising price channel taking shape, with the upper trendline extending to around 70 in the middle of 2008. At this point, I would be content with the first target and take these targets one at a time. In addition, a lot can change in a few months, and a reassessment is necessary as further price action evolves.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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