Let us understand what is Head and Shoulders Pattern in the technical analysis through this short article. This is one of the reliable patterns in the stock market. We will understand the topic with the help of an example of the Ajanta Pharma stock price.
What is the Head and Shoulders Pattern?
The Head and Shoulders Pattern is typically a reversal pattern and it’s generally seen in the up-trends. It is usually most dependable when present at the end of an up-trend. Sooner or later, the market starts to offload and the pattern can show the reversal well in advance.
Features of a Head and Shoulders Pattern
- The formation of the H&S pattern requires a strong bullish trend where the price has moved up from down.
- If the pattern forms in consolidation, we can ignore that, so the first criterion of this pattern is a bull run
- Then the trend halts and corrects a bit and forms the left shoulder.
- Next, the price makes a new high and again from there it corrects back forming the head.
- The 2nd correction is more severe than the first one.
- Finally, the last buying emerges and that takes the price upwards but could not make a new high.
- Now if a correction comes in the market, that will form the right shoulder completing the head and shoulders pattern.
- Watch the image below to understand the pattern.
This Pattern Looks Like an M
In general, when the Head and Shoulders Pattern forms the volume declines confirming the lack of participants on the upside. So to identify this pattern, first, we need a strong rally. Then the price should take support on the same line or level and finally, there should be a final bounce and break of the support. This completes the pattern. If we enable line charts this pattern looks like an M. This pattern is easily identifiable in the line chart.
A properly visible H&S pattern doesn’t occur very often but when it does, it means a major trend reversal is going to happen soon. The pattern arises with an uptrend then reaches a pick and starts to decline, known as the left shoulder. The middle and highest pick point refers to the head and right shoulder again set up with a bearish form.
Example of Head and Shoulders Pattern
This part of the content is going to be an example of the H&S pattern. This is through an analytical review of the Ajanta Pharma stock price on monthly charts. Before stepping into the technical analysis, let’s have a look at some basic fundamental information about the stock. This is on 31st May 2018.
The above chart shows Ajanta’s current stock price movements. It is quite visible that recently the stock follows a bearish trend. To avoid loss, investors must play safe.
Ajanta Pharma Stock Price Analysis Based on Price Action
More About Ajanta Pharma
Ajanta Pharma is a mid-cap pharmaceutical company. Since the year 1973, they are committed to ‘Serve Health Care Needs Worldwide’ and engaged in marketing, manufacturing and development of quality finished dosages. Their business spread in India and more than 30 emerging countries. Recently Ajanta Pharma’s stock price has nicely formed a Head and Shoulders Pattern. Hence, it is advisable to analyze the stock thoroughly before making any decision.
Now, it’s time to look for the analytical review. A chart of Ajanta stock’s price movements is as follows:
The above chart is the company’s monthly chart which reflects a clear Head and Shoulders Pattern. The pattern displays neckline breakdown, the white line in the chart connects the two lows and creates a neckline. When the price breaks the line, the breakdown happens. The head and shoulder pattern completes after the breakdown.
Identifying the H&S Pattern
There was a strong rally in the stock price and that fulfilled the first criteria of the pattern. Now it is visible that the previous Rs. 1000 trend is coming to an end and it is expected to begin a new trend. As the pattern carries a bearish setup, the price will certainly go down.
As the neckline breakdown occurs around Rs 1110, we can expect that the downward trends will fall to at least 50% of the current price, near about Rs.500.
Now, let’s come to the main point, what will be the best decision investors can make? In the analytical review, the main focal point should be how to avoid loss in this situation. According to our analysis, investors must sell their holdings as the price is due for more correction. Traders, however, can sell the stocks in future lots and carry forward the stocks until they target Rs 500 on the downside. Traders must keep a stop loss of Rs. 200-250 on the upside till the target gets achieved. As it is a monthly chart, it is predicted that the target is unachievable overnight. Investors must keep patience and wait for the desired target. SELL in the future market and carry forward your position for the target of Rs. 500.
Ajanta Pharma Stock Price in the Last Year
Till now the target is open on the downside as the price has not touched the target nor the stop loss. As of the month;y charts, the target will come slowly but surely. Price fluctuations, and market trend change, are some common and basic characteristics of the stock market. Investors must prepare themselves for every situation. Keeping patience is the only requirement here. Just carry forward investment until the desired target will be achieved.
No, the head and shoulder pattern is considered to be a bearish indication in the stock market as it suggests that prices are likely to fall afterwards.
The Head and Shoulders pattern is generally seen as bearish because of its shape. It suggests that after the price rises again, there will be a decline back down towards lower levels than before.
The classic “Head & Shoulders” chart formation serves as a reversal signal for traders—a point at which prices have risen so high they may start falling again soon. To put it another way, we watch for two peaks followed by two troughs (the neckline) and one final peak. When this occurs, then we see it as a time to short-sell in the neckline breakdown.
The Head & Shoulders Pattern indicates an upcoming trend reversal which could result in further price decline from its current position. In general terms, you can view this chart formation as one peak (the head) in-between two lower peaks – or “Shoulders”. This could indicate that prices have reached an upper extreme and are ready to make a declining trend in the near future.
In conclusion, the Head and Shoulders Pattern is a quite reliable tradable pattern in the stock market. Though we have shown the example in a monthly chart you can spot this pattern in intraday as well as positional charts. So traders can utilize the pattern very accurately and earn a decent amount of profits in their trading.