The market value of a stock is a determined by pure supply and demand
battles between Bulls and Bears.
This supply and demand is constantly changing on a minute by minute basis.
There are probably hundreds of both rational and some irrational factors
that play into a stock movement.
I believe that stocks move in trends that can last for a long time. During
these major trends, minor counter trends do develop and the trader tries to
take advantage of movement both to the up and down on stocks.
It is also very common to see stocks trade in a range until supply or demand
factors resolve themselves.
It is moves from these consolidation areas that present some of the best
trading opportunities.
These consolidation patterns can take the shape of rectangles, symmetrical
triangles, ascending triangles, descending triangles, flags, double tops or
bottoms and even triple tops and bottoms, head and should formations and
rounding tops or bottoms.
It sometimes amazes me how the stock market follows the same crowd behavior
and keeps repeating these patterns over and over again. The basic nature of
the markets fear and greed exhibits itself everyday.
Let’s examine one of these formations.
Let’s look at a Head and Shoulder formation in
Phone.com (NASDAQ: PHCM).
A Reverse Head and Shoulder. A reverse Head and Shoulder is a Bullish
pattern.
The Head and Shoulders Pattern
The head and shoulders pattern is generally regarded as a reversal pattern
and it is most often seen in uptrends. It is also most reliable when found
in an uptrend as well. Eventually, the market begins to slow down and the
forces of supply and demand are generally considered in balance. Sellers
come in at the highs (left shoulder) and the downside is probed (beginning
neckline.) Buyers soon return to the market and ultimately push through to
new highs (head.) However, the new highs are quickly turned back and the
downside is tested again (continuing neckline.) Tentative buying re-emerges
and the market rallies once more, but fails to take out the previous high.
(This last top is considered the right shoulder.) Buying dries up and the
market tests the downside yet again. Your trendline for this pattern should
be drawn from the beginning neckline to the continuing neckline. (Volume has
a greater importance in the head and shoulders pattern in comparison to
other patterns. Volume generally follows the price higher on the left
shoulder. However, the head is formed on diminished volume indicating the
buyers aren't as aggressive as they once were. And on the last rallying
attempt-the left shoulder-volume is even lighter than on the head, signaling
that the buyers may have exhausted themselves.) New selling comes in and
previous buyers get out. The pattern is complete when the market breaks the
neckline. (Volume should increase on the breakout.)
This pattern can be used on charts of various time frames from minutes to
daily or even weekly charts.
Our charts are 60 minute charts.
Let’s look at reverse Head and Shoulder.
Head and Shoulders Pattern:
A major reversal pattern with four distinct features:
Left Shoulder:
A consolidation period followed by a minor reaction with significantly less
volume than during the drop to the bottom. This is the period July 27 after
the open.
Head:
A higher volume failure with the bottom reaching a lower level than the left
shoulder. This time frame is July 28.
Right Shoulder:
A third rally up to the left shoulder. This is the July 31 and today’s
action of August 1.
Neckline:
The neckline in a reverse Head and Shoulder is drawn across the left and
right shoulders.
The neckline would be at 82 5/8.
If and only if PHCM breaks the neckline and moves up above 82 � would
complete a reverse Head and Shoulders formation.
I would Buy PHCM at 82 � on a Buy stop.
I would place a stop at 80 if filled.
Do not take the trade if the stock does not trade above this neckline.
