By Peter McKenzie-Brown
One of the most bullish stock formations is the inverted
head and shoulder formation. It is a reversal pattern, which begins during a
downtrend. This isn’t strictly true in the case of Telus, since the stock began
to recover from a deep crash six years ago. Furthermore, volume did not move
much as the right shoulder developed. Let those cautions guide your investment
decision.
That said, this chart shows all the characteristics of this
powerful formation, and the recent breakout represents an important mover
upward from a slump the telecommunications stock has been in for a couple of
years. Also, as an illustration the pattern is picture perfect.
As you can see, in this pattern sellers drove this stock
down on high volume late last year, with confidence beginning to return at the
beginning of this year. By March, investors began taking profits, thereby
creating the beginnings of a right shoulder. The breakout, in my opinion, has
just begun and could well sustain itself for a while.
According to some technicians, in some of these moves you
can calculate the size of the upward move by measuring the distance from the
neckline to the head. That, according to those folks, is the size of the prize
you might expect. Personally, I see too much risk in that strategy. I intend to
sell sooner.
In no way does this article represent a buy-or-sell
recommendation, of course. Rather, what I recommend you do is look for this
bullish pattern in your own portfolio.
Also, a word of caution: The mirror image of this image is
the head and shoulders formation. Look for that, too. Unlike the bullish
inverted H&S, the regular head and shoulder configuration is a bearish formation.
If you see it, beware.
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