CTX Tests Head & Shoulders Support

05/27/08 11:25:30 AM

by Arthur Hill

Centex has formed a bearish head & shoulders pattern over the last few months and looks poised to break support for a bearish signal.

Security: CTX
Position: Sell

Figure 1 shows weekly prices for Centex (CTX) with a clear downtrend in progress. The stock broke support around 43 last summer and dipped below 20 in late October. After such a sharp decline, the stock was oversold and ripe for a consolidation or oversold bounce. There were a few bounce attempts, but each failed and a consolidation took hold over the last six months.

FIGURE 1: CTX, WEEKLY. A clear downtrend is in progress.

Graphic provided by: TeleChart2007.

Although not as clear on the weekly chart, CTX traced out a head & shoulders on the daily chart (Figure 2). These can form as reversal or continuation patterns. After a decline, a head & shoulders would be deemed a continuation pattern and a break below neckline support would signal a continuation lower. This is the case with Centex.

The daily chart expands on the head & shoulders pattern. The left shoulder formed in December, the head in January, and the right shoulder in March. Neckline support resides around 18–19. A break below this support zone would confirm that pattern and signal a continuation of the downtrend. Note that volume expanded with weakness over the last few days and selling pressure is intensifying.

FIGURE 2: CTX, DAILY. A head & shoulder pattern traced out on the daily chart.

Graphic provided by: TeleChart2007.

Traditional measurement techniques call for a decline equal to the length of the pattern from the head to the neckline. This would imply a 12-point decline from the neckline break (30 - 18 = 12). With neckline support at 18, this would make the downside target around 6. An alternative would be to measure the percentage decline from the head (peak) to neckline support (30 - 18 = 12, 12/30 = 0.40 or 40%). A 40% decline from the neckline break at 18 would target a move to around 11 (18 x 0.40 = 7.2, 18 - 7.2 = 10.8). Either way you slice it, a neckline support break would be most bearish.

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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HEAD & SHOULDERS

CTX Tests Head & Shoulders Support

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