EMC's Inverted Head & Shoulder?

07/01/10 08:48:14 AM

by Koos van der Merwe

Patterns are an important indicator in a chart pattern, and there is none more convincing than a head & shoulder inverted pattern, especially in a bear market.

Security: EMC
Position: Hold

The head & shoulders pattern is one of the most common and most reliable of all major reversal patterns. The inverse head & shoulders formation is simply the inverse of a head & shoulders top and often indicates a trend reversal from down to up. Volume is usually low at the head, and it should pick up as prices rally from the bottom of the head, fall into the right shoulder, and increase dramatically on the rally from the right shoulder. If the breaking of the neckline is done on low volume, then the trader should be suspicious of the formation. The breakout could be false, usually followed by a retest of the lows. A high-volume breakout, on the other hand, gives us reason to believe that the inverse head & shoulders pattern is genuine.

FIGURE 1: EMC, DAILY. Here, EMC shows a primary and a secondary Inverted head & shoulders.

Graphic provided by: AdvancedGET.

Figure 1 is a daily chart of EMC Corp. and shows what appears to be an inverted head & shoulder pattern. The chart shows the following:

a. The left shoulder occurred on high volume, but the recovery to the neckline was on falling volume, a sign of weakness ahead.

b. The price then fell on falling volume to form the head at $17.06 when volume appeared to be uncertain, before falling again as the right shoulder developed. According to the pattern definition, volume should have picked up as prices rose to the neckline (shown in green) but it did not, only picking up as the price rallied from a right shoulder (in red) and falling as the price fell, suggesting that the alternative right shoulder that is developing could be the more acceptable one.

c. The initial right shoulder (shown in green) broke through the neckline, suggesting a target of $21.36. I have not determined the alternative target; $21.36 is high enough at the moment. The alternative neckline shown in red could act as a resistance level.

d. Finally, do note the relative strength index (RSI)(12 period), which is suggesting bullishness.

EMC is a stock I will be watching. Once it breaks above its pivot point of $19.34 I shall be a buyer, with a first target of $21.36 and a later target still to be determined, but greater than $21.36.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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HEAD & SHOULDERS

EMC's Inverted Head & Shoulder?

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