November 6, 2008

Inverted Head and Shoulder Pattern

By Planet Wealth

In previous stock reviews I have discussed Head and Shoulder patterns, a bearish signal. There is also a bullish version, called an Inverted Head and Shoulder Pattern (IH&S).

These IH&S are found at the bottom of a down trend and can signify a trend reversal. WBC has an IH&S right now on the weekly chart. As you can see from the chart below, they look exactly like a Head and Shoulder pattern that has been tipped upside down. The pattern will not be confirmed until there is a breach of the neckline.

In the case of WBC, the neckline is sloping and there is some resistance not far past the neckline at $25.00. A more conservative trader (especially when going long in this rocky market) may wait for a breach of this $25.00 resistance. Should the stock push past the neckline, it is considered a confirmed pattern and you can then look for the target.

The target is found by measuring the distance from the tip of the head to the neckline, then projecting this measurement from the neckline breach and seeing where it measures to. In the case of WBC, that would be around $31.30, which also happens to be a major resistance line and just before Blue Skies (the highest price area that a stock has not traded at in the past).

(click on image to enlarge)