On the charts: Understanding the Head and Shoulders pattern

A head and shoulder pattern indicates bullish to bearish trend or vice-versa. In simple words, this trend depicts change from positive to negative.

Avdhut Bagkar, Business Standard
24th January

The pattern consists of shaping of three peaks that are categorised into the left shoulder, head and the right shoulder. The left shoulder is formed at the end of a sharp up move on high volumes. After the peak of the left shoulder is formed, there is a subsequent reaction and prices slide on low volume. The right shoulder is formed when prices move up again but remain below the central peak called the 'head' and fall nearly equal to the first valley between the left shoulder and the head or at least below the peak of the left shoulder.

Here are a few stocks that have seen the formation of head and shoulder pattern in the past few sessions:

Bandhan Bank Ltd (BANDHANBANK): With a clear breakdown, this counter helped to co-relate the support of 200-day moving average (DMA) with a Head and Shoulder pattern. The daily chart showed that the right shoulder had taken support on a closing basis around Rs 517, which is its 200-DMA. After a clear breakdown and selling pressure below the 200-DMA, the stock failed to rise above the said moving average.

Eicher Motors Ltd (EICHERMOT): The formation of Head and Shoulder pattern can be seen in this counter as well in the daily chart. The horizontal neckline placed at Rs 20,920 was broken with strong volume, which resulted in the stock falling towards its 200-DMA placed at Rs 19,645 levels. It did reverse, but failed to conquer the 50-DMA located at Rs 21,639. The Moving Average Convergence Divergence (MACD) slipped under the zero line at the time of pattern breakdown.

V-Guard Industries Ltd (VGUARD): The Head and Shoulder formation started from October 2019-mid and ended in November 2019. The high of Rs 246.80 and Rs 239.50 denote both shoulders – the left and right shoulder – with the peak at Rs 259.20 levels. Although the stock broke the neckline with a low of Rs 206.30, subsequent breach has not happened yet.

Finolex Industries Ltd (FINPIPE): The counter never crossed the neckline after the breakdown of Head and Shoulder pattern. Although the both shoulder highs are nearing peak levels, the counter has failed to show a strong reversal. The volumes had risen when the counter slipped below the minor support held after breakdown around Rs 264 levels. This was accompanied by selling pressure on every rise.

General Insurance Corporation of India (GICRE): After a decent rise from Rs 180 to Rs 334 levels, this counter undoubtedly formed Head and Shoulder pattern. A breach of Rs 240, which is its neckline, resulted in a correction towards Rs 225 levels. This level traded around the 200-DMA, which showed support and also a reversal. However, the stock did not conquer the shoulder high, which are Rs 279.80 and Rs 291 levels. This suggests weakness as per the daily chart.

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