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 similarly named, but polar opposite technical events for these two electronics stocks.
A bullish flag follows a steep, or nearly vertical rise in price, and consists of two parallel trendlines that form a rectangular flag shape. The flag can be horizontal (as though the wind is blowing it), however it often has a slight downtrend.
The vertical uptrend, that precedes a flag, may occur because of buyers’ reactions to a favorable company earnings announcement, or a new product launch. The sharp price increase is sometimes referred to as the “flagpole” or “mast”.
The rectangular flag shape is the product of what technical analysts refer to as consolidation. Consolidation occurs when the price seems to bounce between an upper and lower price limit. This might occur, for example, in the days following a positive product announcement, when the excitement is starting to subside, and fewer buyers are willing to pay the high price that was commanded just a few days before. But, at the same time, sellers are unwilling to sell below a lower support limit.
A bullish signal occurs when the price rebounds beyond the upper trendline of the flag formation, and continues the original upward price movement. This is considered a pattern confirmation.
Recommendation: Buy BRCM stock for a short-term trade with a target range of $36.40 – $37.00 and a stop at $30.33.
Head and Shoulders Top
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. Novice investors often make the mistake of seeing Head and Shoulders everywhere. Seasoned technical analysts will tell you that it is tough to spot the real occurrences.
The classic head and shoulders top looks like a human head with shoulders on either side of the head. A perfect example of 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.
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.
Recommendation: Short JKS for an intermediate-term trade with a target range of $3.20 – $3.90 and a stop at $9.89.