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Kenneth Cole Has Potential Bullish Head & Shoulders Pattern

12/21/04 09:18:06 AM
by Chris Manuell

Head and shoulders reversal patterns are the Labrador retrievers of chart formations--reliable and popular. Kenneth Cole Productions is setting up for a bottom head and shoulders reversal pattern.

Security:   kcp
Position:   N/A

Kenneth Cole Productions has remained in an intermediate downtrend after recording yearly highs in April but has since attempted to resume the long-term uptrend from the 2001 lows with a significant low in late October. The stock appears to be tracing out a reverse head and shoulders, having recently completed a right shoulder. The late August trough constitutes the left shoulder, whilst the late October nadir is the head of the formation. Earlier this month, the market stalled at the September peak, which enabled a neckline to be constructed. The near-horizontal neckline comes in at 31.25, the December 2nd high, and a decisive closing violation of this level would complete the reverse head and shoulders pattern. The minimum objective for the market on a closing above the neckline can be calculated by adding the height of the pattern to the breakout point--in this case, the neckline. The depth of the pattern is calculated from the head to the neckline. Deducting the October 22nd trough of 24.66 from 31.29, the neckline point on October 22, gives a value of 6.63. Thus, adding this to the point where the market breaks the neckline provides a minimum objective for the pattern.

The relative strength index (RSI) activity supports a change in the recent bearish sentiment and alludes to a potential reversal. The RSI has migrated to the bullish 40-70 zone recently, which was confirmed with the recent retracement from the 70 level and bounce off the 40 support level. The moving average convergence/divergence (MACD) histogram is also echoing the bullish sentiment as the indicator pushes up against the centerline. A push through the centerline may correspond with a bullish move though the head and shoulders neckline, confirming the shift in momentum to the bulls. The recent close above the 200-day exponential moving average (EMA) is also promising, and multiple closes above this pivotal average would hold the stock in good stead.

Figure 1: Daily chart, Kenneth Cole Productions. Kenneth Cole is setting up for a bottom head and shoulders reversal pattern.
Graphic provided by:
In summary, Kenneth Cole appears to be forming a bullish head and shoulders pattern, which would be confirmed by a decisive closing violation of the neckline. Aggressive traders could start accumulating positions now with a stop below the right shoulder, whilst conservative traders may wait for two closes above the neckline before initiating a position.

Chris Manuell

Chris Manuell spent 7 years as a futures sales/trader for a large investment bank and more recently as a technical analyst for an independent research company. He has a bachelor of economics and graduate diploma in applied finance & investment. Currently enrolled in the CMT program with the MTA.

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Date: 12/28/04Rank: 5Comment: 

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