A Completed Head & Shoulders

10/05/15 02:18:47 PM

by Koos van der Merwe

When a head & shoulders formation has completed its retracement, do you buy the stock?

Security: NXPI
Position: Accumulate

A head & shoulders formation is one of the most common and also the most reliable of all major reversal patterns. When the target suggested has been reached, (or close to it) do you buy the stock? NXP Semiconductor (NXPI) is a stock that has recently completed a head & shoulders pattern. Let's take a look at it.
NXP Semiconductors creates solutions that enable secure connections for a smarter world. The company is driving innovation in the area of connected car security, portable and wearable and %91The Internet of Things.' With operations in more than 25 countries, the company posted revenue of more than $5.65 billion in 2014.

Figure 1. Daily chart showing the Head and Shoulder formation.

Graphic provided by: AdvancedGET.

The chart in Figure 1 is a daily chart showing the head & shoulders formation. The head reached a high of $114.30 on June 1, 2015 and with the neckline at $91.15 on that day, the target for the correction is $68.00. (114.30-91.15=23.15. 91.15 - 23,15 = 68.00). The stock price fell to $71.98 by August 24, 2015 close enough to the target to be acceptable.

An Elliott wave count suggests that the head that formed on June 1, 2015 is a WAVE V top, and that the correction to $71.98 is an ABC correction. Note that the relative strength index (RSI) gave a buy on August 24, 2015 when the share price was $71.98. This means that the rise to $95.22 on September 9, 2015 could be a Wave 1 with the correction to $81.06 by September 29, 2015 a Wave 2.

Note the JM Internal Band indicator which is still negative. The JM Internal Band is a simple 15-period moving average offset by 2% positive and 2% negative. A move above the upper band suggests a buy and below the lower band a sell. The share price is still below the lower band.

Figure 2. Weekly chart with Elliott Wave count

Graphic provided by: AdvancedGET.

The chart in Figure 2 is a weekly chart with an Elliott wave count showing that a WAVE 4 has been completed and that the price of the stock should now rise in a WAVE 5 to $134.50. The PTI (Probability Index) at 32 is weak, and with an RSI still trending down, we could expect a little more weakness before Wave 2 of WAVE 5 bottoms. Note that the colour of the candlestick bar is black, which suggests neutrality. A blue color suggests a buy, and a red color a sell.

A trader could look at the stock for a buy. An investor should wait for a move above the JM Internal Band before buying.

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.