Head & Shoulders

Here’s the chart for Air Asia. It was just shown to me by my remisier. Oh yeh, that’s Jay by the way, my remisier cum friend cum TA mentor cum resident trainer at ChartNexus.

Here’s one of the most bearish patterns and I am gonna teach you guys about it. The wonderful H&S pattern. Some of the classic counters that had it are like YangZiJiang and SPC. I made quite a fair bit from them and you know what happened to them.

The H&S always has a head, as seen, and 2 shoulders, one left one right. Why is it bearish? Simply put, it is a lower high formed, and a crack below the critical support (neckline). Do NOT short it till it has cracked, cause the pattern is NOT complete till it has cracked. This is  true for most formations, be it a breakout (based on closing price, NOT intraday price) such as an ascending triangle (HSI has broken out) and descending triangle which is common in a bear market.

Interestingly, we CAN find a price target. ie, we know roughly where the trend will end up once the break is complete. Many of  these formations eventually hit the TP with a 70-80% accuracy. In a bear market, many have broken way below  the target price (TP) of the chart formation.

Alright here is how it works. Take the height of the formation, to the neckline.  In this case, it is around 1.27-1.08. That is about 20cents. On a successful break, assuming neckline to be around 1.08, take 20cents from it and you get around 88c. That will be the TP.  If you notice, the price eventually found a floor at 84c. So the TP is somewhere around there. It may or may not hit. The trader must decide if he has to close the position prematurely, or allow it to ride further depending on patterns and indicators then. Price, pattern, time. Very important trio.

And look at the rebound today. Nice. Do I wanna long this? Well, I won’t. You could if you want, but it is a downtrending stock. By going long you are going counter trend, ie against the current. You need to be quick to take profits if the price continues trending down after the rebound. It is likely to do so in a downtrend, forming a lower high. This will be bearish still. Until the stock has turned bullish, going long is of higher risk. Remember to do your risk reward analysis.  In this stock, if you go long from today, your support is at 84c so a crack below that say around 80cents you must cut. Minor resistance is seen at 95c. So your risk reward is no good too.

That’s one of the formations for you. Very famous, and  was taght in the classes. Did I enter this trade? No.. didn’t see it, plus I think back then it was a long only counter.