Like many people who enjoy a bit of ‘ye olde fashioned technical analysis’ it’s a heartwarming moment when you find a head and shoulder pattern because they are really the pattern of patterns. Especially from those who are not as fond of technical analysis its the head and shoulder formation which is discussed in the most derisive tone of all. This isn’t what we are here to do today though. The following is a pattern from Aetna (AET) in the US and it’s one that I have been stalking for a while but I thought I better write it up now as we are getting close to a potential entry point.
When you draw this one on your own charts you may want to draw the neckline with a slight upward angle because the second peak is actually a little higher. If we get the type of breakout I would prefer (wide-range or gap) then this type of difference shouldn’t really matter.
The measuring rule on this pattern gives you an initial price target of more than $5 from the point of the breakout on the neckline which should deliver a pretty decent risk:reward ratio if it can make it. As always you will want to place a stop below the neckline. A good quality breakout may allow you to put your stop quite close to the line but otherwise something a little wider may be preferential (>1.5 ATR or similar).