Today we will be analyzing another head and shoulders patter (H&S). For a review of the definition of a head and shoulders patter, please feel free to take a look at yesterday’s article on AAPL.
3D Systems Corporation engages in the design, development, manufacture, marketing, and servicing of 3D printers and related products, print materials, and services. The company’s principle print engines comprise stereolithography, selective laser sintering, multi-jet modeling, film transfer imaging, selective laser melting, and plastic jet printers. Its 3D printers convert data input from computer-aided design software or 3D scanning and sculpting devices to produce physical objects from engineered plastic, metal, and composite print materials. In addition, it provides custom parts services, such as precision plastic and metal parts service and assembly capabilities. The company markets its stereolithography materials under the Accura and RenShape; laser sintering materials under the DuraForm, CastForm, and LaserForm; and materials for professional printers under the VisiJet brands. It primarily serves manufacturers of automotive, aerospace, computer, electronic, defense, education, consumer, energy and healthcare products, as well as original equipment manufacturers, government agencies, universities, and independent service bureaus.
To review the H&S pattern that has formed on 3D’s stock, please take a look at the 1-year chart of DDD (3D Systems Corporation) below with my added notations:
DDD has been on a nice rally since December of last year. Over the last (3) months though, the stock has created a very important level at $32.50 (blue), which would also be the “neckline” support for DDD’s possible H&S pattern. Above the neckline you will notice the H&S pattern itself (red). Confirmation of the H&S would occur if the stock broke below its $32.50 “neckline”. If DDD breaks that level, the stock should move lower from there.
Keep in mind that simple is usually better. Had I never pointed out this H&S pattern, one would still think this stock is moving lower simply if it broke below the $32.50 support level. In short, whether you noticed the pattern or not, the trade would still be the same: On the break below the key $32.50 level.
The Tale of the Tape: After embarking on a 10-month uptrend, DDD seems to have formed a head & shoulders pattern. Although a trader could go long at 32.50 expecting a bounce, the stock’s pattern implies an eventual breakdown. If that happens, a short trade should be entered on a break of the $32.50 level.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT