Yahoo! Head & Shoulders

09/14/09 12:13:20 PM

by Chaitali Mohile

Is a short-term head & shoulders on Yahoo's technical chart a valid formation?

Security: YHOO, $NDX
Position: Buy

On the daily chart in Figure 1, Yahoo Inc. (YHOO) formed a short-term head & shoulders with a descending neckline support. The descending neckline is a sign of weakness or a bearish force. The volume throughout the formation was highly volatile. The right shoulder and the head fulfill the required conditions for the valid head & shoulders -- a bearish reversal formation. But the left shoulder is not sharp and convincing. We can also see that as the left shoulder touched the descending neckline, YHOO surged and later formed a bullish engulfing pattern within the rally. The bullish reversal candlestick pattern suggested more upside for the stock. In other words, the descending neckline support could not be breached due to the bullish force. The relative strength index (RSI) (14) also formed a similar pattern. The indicator rallied upward to retest the resistance at 50 levels.

FIGURE 1: YHOO, DAILY. The fresh buying pressure and the RSI's (14) upward move resulted in the head & shoulders pattern failure.

Graphic provided by: StockCharts.com.

The bullish engulfing pattern assured traders to stay long, and as a result, the buyers volume increased. The average directional movement index (ADX) (14) in Figure 1, indicating a declining downtrend, turned weaker due to a sudden rise in a buying pressure. Although the ADX (14) is in a consolidation zone between 15 and 20 levels, the buying pressure has surged above 30. Thus, neither the RSI (14) nor the ADX (14) has turned bearish to initiate a bearish breakout of the head & shoulders pattern. As a result, the bearish reversal pattern in Figure 1 failed.

After the bullish engulfing pattern, YHOO gapped upward and continued to rally higher. Due to the breakaway gap, the RSI (14) slipped into an overbought area above the 60 levels. Therefore, the stock would slowly move upward until a bullish trend was developed. The small candles above the gap up reflected an exhausted rally and the possibility of consolidation.

FIGURE 2: $NDX, DAILY. The negative divergence of RSI(14) would depress the current bullish rally.

Graphic provided by: StockCharts.com.

The NASDAQ 100 Index ($NDX) has surged above the 1687 level, forming higher highs (Figure 2). On the other hand, the RSI (14) has sloped downward, suggesting a negative divergence for the rally. Due to the negative divergence, the index is likely to lose a few points from the current higher level. This short-term bearish rally of $NDX would defiantly affect the stock, including YHOO.

Considering these technical aspects of YHOO as well of $NDX, I would suggest a fresh long position above $16 with an immediate target of $17.50 (previous high). Later, the stock would continue to move higher on strong bullish support.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company:	Independent
Address:	C1/3 Parth Indraprasth Towers. Vastrapur
	Ahmedabad, Guj 380015
E-mail address:	chaitalimohile@yahoo.co.in
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HEAD & SHOULDERS

Yahoo! Head & Shoulders

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