Both ETFs have developed head-and-shoulders patterns over the past 65 days. YINN has a head-and-shoulders top, while YANG shows the exact inverse head-and-shoulders bottom. Let’s get into what those patterns mean.
YINN: Head-and-Shoulders Top
Click to EnlargeThe classic head-and-shoulders top looks like a human head with shoulders on either side of the head. The pattern has three sharp high points, created by three successive rallies in the price of the financial instrument.
The first point – the left shoulder – occurs as the price of the financial instrument in a rising market hits a high and then falls back. The second point – the head – happens when prices rise to an even higher high and then fall back again. The third point – the right shoulder – occurs when prices rise again but don’t hit the high of the head. Prices then fall back again once they have hit the high of the right shoulder. The shoulders are definitely lower than the head and, in a classic formation, are often roughly equal to one another.
YANG: Head-and-Shoulders Bottom
Click to EnlargeA 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.
For both bullish and bearish head-and-shoulders patterns, the neckline is a crucial element.
The neckline is formed by drawing a line connecting two price points of the formation (the lows or highs). The first 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 (or downturn) to the right shoulder. The neckline can be horizontal or it can slope up or down. Head-and-shoulders bottom patterns usually slope down.
The pattern is complete when the support provided by the neckline is “broken.” For a head-and-shoulders top, this occurs when the price of the financial instrument, falling from the high point of the right shoulder, moves below the neckline. For a head-and-shoulders bottom, this occurs when the price of the stock, rising from the low point of the right shoulder, moves up through the neckline.
Recommendation: Buy to open YANG for a price target of $13.90 – $14.50, with a stop at $10.06. Or short YINN for a price target of $10.60 – $11.60, with a stop at $17.95.
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.