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A Head and Shoulders (H&S) pattern is a reversal pattern that forms after an uptrend. A textbook H&S pattern starts to form when a stock rallies to a point and then pulls back to a particular level (left shoulder). Next, the stock will rally again, but this time to a higher peak (head) than the previous one. After forming the head, the stock will pull back to the same support that the first shoulder did. Finally, the stock rallies a 3rd time, but not as high as the head (right shoulder). The level that has been created by all 3 of the pullbacks is simply a support level referred to as the “neckline”. The formation of an H&S pattern warns of a potential reversal of the uptrend into a possible downtrend.
Hologic Inc. develops, manufactures, and supplies diagnostic, medical imaging systems, and surgical products for the healthcare needs of women. The company operates in four segments: Breast Health, Diagnostics, GYN Surgical, and Skeletal Health. The Breast Health segment offers breast imaging products, such as Selenia full field digital mammography system, breast tomosynthesis, healthcome mammography products, screen-film mammography systems, SecurView workstation, CAD systems, stereotactic breast biopsy systems, breast biopsy products, breast brachytherapy products, MammoPad breast cushions, and photoconductor coatings, as well as Sentinelle medical MRI breast coils and workstations. The Diagnostics segment provides ThinPrep system, a solution for cervical cancer screening; rapid fetal fibronectin test for pre-term birth risk assessment. The GYN Surgical segment offers NovaSure system, a minimally-invasive procedure that allows physicians to treat women suffering from excessive menstrual bleeding; MyoSure system for the hysteroscopic removal of fibroids. The Skeletal Health segment provides QDR X-Ray bone densitometers that assess the bone density of fracture sites.
To review the H&S pattern that has formed on Hologic’s stock, please take a look at the 1-year chart of HOLX (Hologic, Inc.) below with my added notations:
HOLX has been trending higher since June. Over the last (2) months though, the stock has created a key price level at $20 (red), which would also be the “neckline” support for the H&S pattern. Above the neckline you will notice the H&S pattern itself (blue). Confirmation of the H&S would occur if HOLX broke its $20 “neckline” support. If that happens, the stock should be moving lower from there.
One needs to look no further than this past April to see what could result if HOLX breaks $20. The stock created an H&S pattern then too with the same $20 support.
The Tale of the Tape: HOLX has formed another Head & Shoulders pattern. Although the $20 support may hold for long trades, the pattern implies another impending break lower. A break of the $20 “neckline” would present an opportunity for a short trade.
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