As I was surveying the tech sector with my Trending123 Pattern Scan powered by Recognia, I noted something quite interesting — an intermediate-term bearish pattern in tech giant Google (GOOG). Recently in the news for the acquisition of Waze, and for whispers of a coming stock split, this stock may have some long-term growth ahead, but for the next six weeks to nine months, a bearish formation is underway.
Downside Target for this Pattern: $764.00 – $783.00
The head and shoulders top is an extremely popular pattern among investors because it’s one of the most reliable of all formations. It also appears to be an easy one to spot — but seasoned technical analysts will tell you that it is tough to spot the real occurrences.
The first point — the teeny left shoulder you’ll see around late April — occurred as GOOG hit a high in a rising market and then fell back. The second point — the head — happened when prices rose to an even higher high and then fell back again. The third point — the right shoulder — occurred when prices rose again but didn’t hit the high of the head. Prices then fell back again once they hit the high of the right shoulder.
The shoulders should always be lower than the head and, in a classic formation, are often roughly equal to one another. However, as you can see in this pattern, that’s not always the case in the real world.
Characteristics that would confirm a pattern like this include a break below the neckline, support/resistance and the location of the moving average.
Look for a region of support or resistance around the target price. A region of price consolidation or a strong support and resistance line at or around the target price is a strong indicator that the price will move to that point.
Location of Moving Average
The head and shoulders top should be above the moving average. For short duration patterns use a 50 day moving average, for longer patterns use a 200 day Moving Average. In Google’s case, the pattern is above both.
A key element of the pattern is the neckline. The neckline is formed by drawing a line connecting two low price points of the formation. The first low point occurs at the end of the left shoulder and the beginning of the uptrend to the head. The second marks the end of the head and the beginning of the upturn to the right shoulder. The neckline can be horizontal or it can slope up or down. The pattern is complete when the support provided by the neckline is “broken.” This occurs when the price of the financial instrument, falling from the high point of the right shoulder, moves below the neckline. Technical analysts will often say that the pattern is not confirmed until the price closes below the neckline – it is not enough for it to trade below the neckline.
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. Trending123 members receive access to the Trending123 Pattern Scan powered by Recognia free as part of their membership.