As was evident from my weekly chart analysis of ILF, what appears to be a reverse head-and-shoulders bottom formation on the daily chart can look like a flag formation on a weekly chart. That is why it is generally not a good idea to anticipate the completion of a reverse H&S bottom formation unless you have strong technical evidence from the on-balance volume or the RS analysis.
Pengrowth Energy Corp. (PGH) is a high-yielding (7.6%) oil and gas company. The daily chart shows what still may be a reverse head-and-shoulders bottom formation. However, last week, it failed to surpass the neckline, line b, and has now violated short-term support at line d.
The pattern of the OBV is not encouraging either, as it is still locked in a trading range, lines f and g. A break through resistance is needed to turn the outlook to bullish.
There are several ways to draw the neckline because of the twin highs in August and early September, but I think that line b is the most valid. It could also be drawn connecting the late-August and late-October highs (line c). This neckline was overcome in early December. The 50% retracement resistance at $11.30 also made me select line b as the more significant level.
No matter which neckline is used, a drop below the support at $10, line e, would weaken the pattern, and a break below the RS at $9.37 would indicate that this is not a reverse H&S bottom formation. If the neckline (line b) is overcome, the upside target from the reverse H&S bottom formation is in the $14.80 area.
There are quite a few more current examples I could’ve used in this article, including the chart of Southern Copper (SCCO), which I discussed here, and the regional banks I covered earlier in the week.
I would suggest that you go to any of the popular charting sites, and I hope you will now be able to identify quite a few completed and several potential reverse H&S bottom formations.
Before you take trades based on your findings, however, analyze the volume closely, especially the on-balance volume. Once the neckline is broken, try to buy on a retest of the neckline level. In advance of your buy order, you should calculate the potential target from the formation and where you will place your stop. Only then will you be able to determine whether the risk is worth the potential reward.