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Head & Shoulders or Cup & Saucer?

10/11/02 11:44:50 AM
by Koos van der Merwe

Often a pattern will start developing a left shoulder and a head. Then there will be the inevitable wait for the right shoulder to develop in order to form a true head and shoulder pattern. If the right shoulder does not develop, could it be a cup and saucer pattern instead? The share Vaxgen Inc. [VXGN] appears to be developing such a pattern.

Security:   VXGN
Position:   Hold

In the chart below you can clearly see an inverse head and shoulders pattern in the making. The question is, has the right shoulder fully developed or has it a way to go?

The RSI indicator is suggesting further downside because it is moving downwards from an overbought position, but the JM internal trading band has given a second buy signal, and the pennant, if it could be called that, has also suggested a buy signal as the price broke out of the upper downsloping trendline. Finally the close did test the resistance level at $10.82, actually exceeding it with the high of the day, but then fell back to below resistance. Now what will happen?

Head and Shoulder or Cup and Saucer ?
Graphic provided by: AdvancedGET.
Those who were lucky enough to have bought the share at $6 or less should place their stop orders as close to the high reached as possible. For some verification, a recent article in Technical Analysis of Stocks & Commodities proved that a 5% stop from the high was the most profitable. Those who are tempted to buy at present levels because of the JM buy signal are hesitant because of a downtrending RSI indicator. So we then look to the cup and saucer buy signal, which would be a closing price above $10.82 as the buy signal with a possible target of $16.

I arrived at the buy signal using the following equation.

The depth of the cup: 10.82 - 4.84 = 6. (rounded off)

10.82 + 6 = 16.82, which I have rounded off to $16.00.

This share should be watched for a future trade.

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.

Address: 3256 West 24th Ave
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Date: 10/16/02Rank: 1Comment: 
Date: 10/23/02Rank: 3Comment: good explanation. something like my CPO charts. TQ.

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