Technical analysis - help with head & shoulders (MFS)

Hi all

I am still a beginner on technical analysis and would appreciate any advice on head and shoulder patterns.

Firstly, the stock is MFS. I have held MFS for nearly 2 years now (and will continue to do so ) but have recently been using CFDs as well. Fundamentally, this will definately be a long term stock for me.

I am quietly confident this stock will be heading upwards soon after about 2 months of consolidation, and am looking to buy some CFDs. However, having read the technical analysis threads on ASF and Incredible Charts, it seems that the recent head and shoulders is a reversal pattern, which makes me not so sure anymore... (charts are attached but haven't yet figured how to annotate and import them from Incredible Charts - sorry!)

Will this reversal pattern definately lead the sp down (as it seems with all diagrams I have seen) or is there a possibility it can 'breakout'? If a downtrend starts from here, is it on the way to the trend line beginning in July 2005 or possibly lower? I remember tech/a saying that 'price action never lies'.

Cheers

scsl

Generally with H&S patterns once the neckline (trend line connecting the two lows around 3.80) is breached you get a signal to go short. Waiting for price to break through it and retest it as resistance is the best entry for some. The minimum expected drop is the height of the head (middle peak top to neckline) added to the point at which it breaksdown. H&S are often easy to spot in their typical form but I'm not sure how many out of a hundred such patterns would follow the textbook pattern. Eitherway volume looks to correspond in this one. Generally speaking we have a lower swing high so that's bearish too but I have got caught in H&S patterns which do not do what the texts say- see the AZR thread for example. This is not financial advice so do your own research etc, just my views.

We may also be seeing a much larger H&S pattern on the weeklies, these recent peaks being the head, the right shoulder is yet to form.

Also, price action may not lie but I often have trouble understanding what it is saying so I'll just keep trying to listen more closely

In IC if you right click you can choose to save the chart to file, then open it and edit it- that's how it was sometime ago when I last used it. Then just edit the file as required in MS Paint or similar and attach to your post on ASF via the attachment button.

Hello scsl,


Firstly, no one is likely to give you financial advice on what MFS is likely to do, since this would contravene the new financial reforms under the auspices of ASIC. Having said this though, if you want to talk technical analysis concepts generically, perhaps this would be a more appropriate way to approach your question. (Please understand that the new reforms are quite stringent, hence the need for formality here).

Secondly, I would argue that “Technical Analysis” is an art, and not a science (although it can involve science/logic, and some would argue differently – especially if you’re into moving averages and oscillators and other such “lagging indicators”).

Interpreting charts is a skill which every individual will perceive uniquely. Put 10 traders in a room, and you’ll have 10 different perspectives. Some may agree on one thing, and not another. Sure, there are schools of technical analysis thought that use agreed concepts, but how these are applied can range widely from person to person (for example get a room full of Elliott Wave experts to label waves and see what happens).

Ok, head and shoulder (H&S) patterns. Ultimately I think they are bunk, but can have limited use in concert with other patterns (but that’s my opinion, and others swear by it). Sometimes they work, and sometimes they don’t. The theory is that the underlying will move at least the distance from the neckline to the top in the opposite direction - i.e. pull back the same distance from the neckline to the top projected down (or vice versa for an inverted H&S).

Whenever I see a lower high, I recognise that there is some risk of downside price action. The real art is in looking at the whole pattern of trend, in daily weekly and monthly charts (and intraday if you’re using that time frame).

You can interpret a whole host of technical concepts like - looking for base or topping patterns, examining wave structure, looking at price extensions/retracements, interpreting bars and volume. All of these elements can give you clues to make forecasts in time and price. Of course the time element is a little more controversial, so we won’t go into that here. The core point is though that anything can happen in the market, and every moment is unique (ala Mark Douglas’ “Trading in the Zone”).

If you ask for technical analysis texts in this forum, you will receive a deluge of conflicting works. All the technical traders I know have spent years studying various approaches and each have developed their own special brand of analysis based on their personal experience and preferences. You’ll get Elliott Wave enthusiasts (I do subscribe to this school), moving average/oscillators backtesters/mechanical traders, candle stick traders, etc (and maybe even the odd Gann player).

So, you have the whole constellation of technical approaches to explore. I will give you one piece of advice though: Develop confidence in yourself, and trade your own knowledge!



Regards


Magdoran

Hi scsl

:iagree: 100% with everything magdoran posted.

The only addition I would make is to say that imo you technically don't have a head and shoulders pattern yet, until the second shoulder is completed by retesting the ~$3.80 level.

A close below the neck line is technically a sell signal with the theoretical price target as described by RichKid and Magdoran.

But it's quite possible, in theory at least, that MFS will continue to rise from the current price and so technically a head and shoulders pattern will not have been formed at all in that case.

So from my point of view, I would not assume that this will necessarily end up forming a H&S pattern but I would set a stop loss/protect profit just below the neck line just in case it does turn out to be a H&S pattern.

hope this helps

bullmarket

I wouldn't define it as a head and shoulders as the shoulders aren't that well defined and look more like noise. What's interesting is the large volume on the up thrust. It looks like to me that it just moved up on some news has just drifted down and has continued consolidating. However, the people who bought on the upthrust have not sold out as yet.

Still the same principals apply, $3.80 is a pretty strong support level so if it breaks on volume then it would be a pretty strong sell signal.

MIT

i've attached a chart of MFS...

looks like the right shoulder is forming maybe? should i be looking out for the sp to move up to the 4.10-4.15 level (which is the peak of the left shoulder)?

as mentioned by RichKid, bullmarket and mit, the 3.80 level has turned out to be a pretty important support level. this level has been breached once and has come close to being breached 4 times.

as stupid as it sounds, i don't think MFS's sp deserves to be brought down any more. however, if the sp does go below the neckline towards the yellow uptrend support, i think it will only make the rise in sp down the track stronger and more dramatic, especially when its annual results are released in august.

scsl,

The right shoulder should be lower for it to be a more powerful sign of weakness, but this alone is not something to act on.

as stupid as it sounds, i don't think MFS's sp deserves to be brought down any more.

Click to expand...

Don`t think what the price should do, just understand where it is at.

Snake

MFS has fallen below the important support level of $3.80. i'm still holding onto my batch of shares but am wondering how many of you think that it will continue down to its theoretical price target of about $3.10?

ie pull back the same distance from the neckline (3.80) to the top (4.50) projected down.

will the fact that the right shoulder formation was dragged out, and thus finding more buyers, prevent it from reaching the theoretical target?

the next question is not related to H&S but i'm sure the techies will be interested. looking at the longer term chart for MFS, what will determine whether it finds support at the (yellow) trend line or the next major support level at $3.00? from what i've read in the MIG and WPL threads, it seems as thoough once the price breaks a support level, it will continue ALL the way down to the next support level (usually a previous consolidation phase)... but surely, a long term trend line [some of you may argue that MFS's trend line has not been so long] can also give strong support?

scsl said:

MFS has fallen below the important support level of $3.80. i'm still holding onto my batch of shares but am wondering how many of you think that it will continue down to its theoretical price target of about $3.10?

ie pull back the same distance from the neckline (3.80) to the top (4.50) projected down.

will the fact that the right shoulder formation was dragged out, and thus finding more buyers, prevent it from reaching the theoretical target?

the next question is not related to H&S but i'm sure the techies will be interested. looking at the longer term chart for MFS, what will determine whether it finds support at the (yellow) trend line or the next major support level at $3.00? from what i've read in the MIG and WPL threads, it seems as thoough once the price breaks a support level, it will continue ALL the way down to the next support level (usually a previous consolidation phase)... but surely, a long term trend line [some of you may argue that MFS's trend line has not been so long] can also give strong support?

Click to expand...

See the thing is, that jump from 3 to 4, was on guidance from company about growth of 20% pa. In thsi case TA head & shoulders may not apply, as it didnt rise on no news in the first place

Earnings and Dividends Forecast (cents per share)
2005 2006 2007 2008
EPS -6.8 24.4 31.1 39.2
DPS -- 14.0 18.5 23.5

thx

MS

Hi just as a matter of interest the right shoulder of the head and shoulders that you discovered could equally be taken as the left sholder of of the NEXT head and shoulders formation!!! If you draw a line accross the shoulders it is .30 High which is odd because the August "dip" is about .30 deep mind you it is all so much easier with 20/20 hindsight.

Happyjack

Rather than looking at it from a pattern, it's probably better to look at it from a sentiment point of view...

My view of this sentiment would be as follows: In March 06 we have a nice rising trend with volume... then in June 06 we have a sharp gap up to the $4.50 mark with good volume but much less than March 06... So from this I would say that this big gap up in June 06 comes as a result of all the novice traders jumping on board making one last exhaustive gap up... now we have no more buyers to keep pushing the prices up (demand is met), so the selling pressure kicks in... all those people who bought at the peak are probably hopeful at this stage saying "it will come back"... so I don't think the fear has kicked in yet because the volume retrace to $4 is low.... if prices drop further than support of $3.80, then people at the top will run to cover position (+ short sellers) and prices will drop fast...

My opinion would be to see if prices consolidates around $4 over some time... if it can't hold at that level, then look to probably enter at $3 - $3.20