Suri Duddella shares a couple of chart pattern set-ups in networking sector stocks.
With the anticipation and expansion of 5G networks and its effect on numerous industries, Networking Sector stocks and high on investors’ radar.
Here is a list of Networking Stocks and their performances in 2019 and 2020.
Inverse Head & Shoulders Pattern
One of the most popular chart patterns in market analysis is the Head and Shoulders pattern. The Head and Shoulders pattern forms near market tops in an established sideways to up-trending or bullish markets. It is a reversal pattern as it signals a reversal from the established uptrend and ignites a downtrend from its breakdown.
These patterns are signified by three successive peaks (tops) resembling two shoulders on both sides and a head in the middle. The head is the largest of the three peaks. An Inverse Head and Shoulders pattern is the head and shoulders pattern upside down (mirror image) and follows a similar structure and trading rules in reverse as a Head and Shoulders pattern. Inverse Head and Shoulder patterns are also reversal patterns and form in established downtrends.
Trading Inverse Head & Shoulders Pattern
Entry: After right-shoulder formation and pattern completion, if price closes above the neckline with increased volume, enter a long trade above the breakout bar's high.
Stops: Place a stop below the middle of neckline and right-shoulder, and 2. Place a final stop below the low of the right shoulder.
Targets: Targets are projected from the neckline level. Measure the height of the head and use Fibonacci ratios to compute targets. The first target range is between 62% and 79% of the height of the head, and the second target range is 127% to 162% above neckline.
Cisco Set-up
The following chart shows a daily chart of Cisco Systems Inc. (CSCO) with a developing Inverse Head & Shoulders pattern from October 2019 and now (see below). The Inverse Head and Shoulders pattern only signals a trade after price closes above the neckline, indicating a breakout. CSCO's neckline is at $48.98. If price closes above the neckline, a long trade is entered with a stop below the right-shoulders' low of $45.84. Targets are set at $52.50 to $53.40 and $56.00-58.00.
Mellanox Technologies Inverse H&S Pattern
The following daily chart of Mellanox Technologies Ltd. (MLNX) shows a clear Inverse Head & Shoulders pattern. MLNX formed the pattern between April 2019 and December 2019. In January 2020, MLNX closed above the neckline ($114.27) to signal a breakout. A long trade is entered at $114.25 with a stop below $108.72. Targets are placed at $119 to 120.75 and $124-127.5.
As you can see, the first target has been reached, but there may be an opportunity to buy and a dip and see if it can reach its upward target.
Find more of Suri’s work at surinotes.com.