Working Money magazine.  The investors' magazine.
Traders.com Advantage

INDICATORS LIST


LIST OF TOPICS





Article Archive | Search | Subscribe/Renew | Login | Free Trial | Forgot ID?


PRINT THIS ARTICLE

HEAD & SHOULDERS


Ford In Fresh Downtrend

07/12/12 12:24:56 PM
by Chaitali Mohile

A bearish breakout of Ford Motor would initiate a new downtrend.

Security:   F
Position:   Sell

Ford Motor (F) has formed a head & shoulders pattern at the bottom of a descending rally on the weekly time frame chart (Figure 1). This pattern is considered as a major trend reversal pattern when it appears at the top of the rally. A bearish breakout of this pattern gives birth to a new downtrend, terminating the bullish force in the stock/index. However, the average directional index (ADX) (14) was very jittery. Neither of the two trends could sustain for a longer period.

Earlier, an uptrend helped F to climb with the support of the 50-day moving average (MA). But the trend indicator lowered as the rally formed a top at $19. Thereafter, the declining rally witnessed huge selling as well as buying pressure, resulting in an unstable trend. After breaching the 50-day MA support, the bears turned stronger and captured the trend. F had already moved in a downtrend before forming the head & shoulders formation.

FIGURE 1: F, WEEKLY
Graphic provided by: StockCharts.com.
 
Hence, we will consider the H&S as a continuation pattern (consolidation) that will resume the existing rally after the breakout. The important point to watch is a bearish breakout of the 200-day moving average (MA) support along with the neckline support of the pattern. This breakout would add to the bearish confidence, strengthening the developing downtrend in Figure 1.

The relative strength index (RSI) (14) is also descending, and the moving average convergence/divergence (MACD)(12,26,9) is suggesting bearish momentum in the rally. Therefore, the downward breakout of the head & shoulder continuation pattern and the 200-day MA would result in major damage for the stock.

However, it would be the best buying opportunity for short-selling traders.


FIGURE 2: F, MONTHLY
Graphic provided by: StockCharts.com.
 
In Figure 2, the monthly chart, F has formed a head & shoulders pattern, a bearish trend reversal formation under the resistance of the 200-day MA. Since the pattern formed at the top of the previous bullish rally, a bearish breakout of the pattern would initiate a fresh long downtrend for the stock.

The declining neckline support shows bearish strength. Here, the 50-day MA support is coinciding with the neckline support. Therefore, the bearish breakout would lead to a major correction in F.

The potential target for the head & shoulders is measured by subtracting the length of the head from the neckline level. Here, the length of the head is 19 - 8.5 = 10.5, thus 10.5 - 8 (breakout point) = 1.5 is the minimum estimated level for F.

The bearish breakout would reverse the previous declining uptrend and develop a fresh downtrend for the stock. The RSI (14) has formed lower highs, indicating increasing bearish force. The moving average convergence/divergence (MACD)(12, 26,9) is negative and is ready to plunge in negative territory. Thus, all the conditions are favorable for the bearish breakout.

To conclude, the head & shoulder bearish breakout would begin the fresh downtrend for F.




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

Traders' Resource Links
Independent has not added any product or service information to TRADERS' RESOURCE.

Click here for more information about our publications!


Comments or Questions? Article Usefulness
5 (most useful)
4
3
2
1 (least useful)

PRINT THIS ARTICLE





S&C Subscription/Renewal




Request Information From Our Sponsors 

DEPARTMENTS: Advertising | Editorial | Circulation | Contact Us | BY PHONE: (206) 938-0570

PTSK — The Professional Traders' Starter Kit
Home — S&C Magazine | Working Money Magazine | Traders.com Advantage | Online Store | Traders’ Resource
Add a Product to Traders’ Resource | Message Boards | Subscribe/Renew | Free Trial Issue | Article Code | Search

Copyright © 1982–2019 Technical Analysis, Inc. All rights reserved. Read our disclaimer & privacy statement.