All day I scan the charts looking for technical patterns to trade. My Trending 123 Pattern Scan powered by Recognia is one useful tool I have to scan the markets quickly, and it is showing two polar opposite technical events for these retail stocks.
Head and Shoulders Bottom
Click to Enlarge Coastal Contacts (NASDAQ:COA) is a direct-to-consumer contact lens company that has developed a head and shoulders bottom in its stock over the past 93 days. The price seems to have reached the end of a period of “accumulation” at the bottom of a major downtrend; the break up through resistance signals a reversal to a new uptrend.
A perfect example of the head and shoulders bottom has three sharp low points created by three successive reactions in the price of the financial instrument. It is essential that this pattern form following a major downtrend in the financial instrument’s price.
The first point – the left shoulder – occurs as the price of the financial instrument in a falling market hits a new low and then rises in a minor recovery. The second point – the head happens when prices fall from the high of the left shoulder to an even lower level and then rise again. The third point – the right shoulder – occurs when prices fall again but don’t hit the low of the head. Prices then rise again once they have hit the low of the right shoulder. The lows of the shoulders are definitely higher than that of the head and, in a classic formation, are often roughly equal to one another.
The neckline is a key element of this pattern. The neckline is formed by drawing a line connecting the two high price points of the formation. The pattern is complete when the resistance marked by the neckline is “broken”. This occurs when the price of the stock, rising from the low point of the right shoulder moves up through the neckline. Many technical analysts only consider the neckline “broken” if the stock closes above the neckline.
The volume sequence should progress beginning with relatively heavy volume as prices descend to form the low point of the left shoulder. Once again, volume spikes as the stock hits a new low to form the point of the head. It is possible that volume at the head may be slightly lower than at the left shoulder. When the right shoulder is forming, however, volume should be markedly lighter as the price of the stock once again moves lower.
For a true reversal, experts agree that heavy volume is essential.
Recommendation: Buy COA for a $7.70 – $8.00 target, with a $5.27 stop.
Click to Enlarge Nordstrom (NYSE:JWN) is a fashion retailer that has developed a diamond top pattern in its stock over the past 248 days. The price seems to have reached a top, showing signs of reversal as it has broken downward after a period of uncertainty or consolidation.
Diamond patterns usually form over several months in very active markets. Volume remains high during the formation of this pattern. The diamond top indicates a reversal to a downtrend.
The diamond top pattern occurs because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward. The technical event occurs when prices break downward out of the diamond formation.
Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. This pattern is likely to be a longer-term trade.
Recommendation: Short JWN for a $39.00 – $42.00 target, with a $55.16 stop.
InvestorPlace advisor John Lansing tracks the charts all day and offers expert technical analysis in his day trading, options and trading services: Power Trading at the Open, Parabolic Options and Trending123. For more information on which service is for you click here.