Of all stock technical analysis patterns, probably the most famous is the head and shoulders pattern.
Edwards and Magee call it “the most reliable of the major reversal patterns,” on in their seminal work Technical Analysis of Stock Trends (Sixth Edition, p. 64).
What is it and what does it mean?
As the name implies, the pattern looks like the silhouette of a head and two shoulders.
What it implies is that a stock is losing its upward momentum and is set for a large decline.
As a healthy stock advances it makes higher highs and higher lows.
The head and shoulders pattern reveals a stock that is stagnating. First it rallies as before, then suffers a pullback, creating the left shoulder and the first point of the neckline. The next rally attempt results in a higher high — the top of the head — but also a return back to the previous low, establishing the second neckline point. The final rally attempt is weak. It cannot make it back to the previous high before crashing back to the neckline.
This is exactly the price action we see demonstrated by the once formidable Intel. This pattern has been building for over a year. If the pattern is valid, the stock will break down through the neckline “by a decisive margin” according to Edwards and Magee (p.69). Measuring the height of the head from the neckline implies a potential decline to 21.
(But these things don’t always work out.)
Earnings will be released on Wednesday, July 15th after the market close. Expect that report to be a catalyst for a large move in the stock.