#39;Inverse Head Shoulder pattern in CNX Pharma suggests better days for pharma stocks#39;
What is Inverse Head & Shoulders Pattern?
The head and shoulders chart pattern is popular and easy to spot pattern. Patterns are formed due to supply and demand dynamics and decisions traders take in certain situations. In technical analysis, an Inverse head and shoulders pattern describes a specific chart formation that projects a bullish trend reversal.
An Inverse Head and Shoulders reversal pattern forms after completion of a down trend. In the standard Inverse head and shoulders pattern, we connect the high after the left shoulder with the high created after the head. A trend line is drawn by connecting these highest points of the two peaks, which is called as “Neckline”. This trend line is the most important component of Inverse H& S pattern.
Why to buy Nifty Pharma?
Nifty Pharma is trading above strong resistance line standing around 7,964 levels indicating strong bullish bias to continue further.
Recent formation of Inverse Head & Shoulders pattern has given a breakout by trading above 7,950 marks which suggests buying in the Pharma index for higher targets of 8,888.
As Nifty Pharma Index is giving bullish breakout, majority of the pharma stocks looks lucrative for higher targets — Lupin, Sun Pharma, Biocon, etc.
Figure 1. Inverse Head & Shoulders pattern and Buy signal on Nifty Pharma
1. Recent close prices (8,071) are trading above neckline (7,970) of Inverse Head & Shoulders pattern indicating trend reversal to uptrend.
2. Short- term moving average 20 DMA (7,857) defines short-term trend is providing support to buyers as prices are sustained and trading above it.
3. Mid- term moving average 50 DMA (7,750) defines mid-term trend is very well augur with bulls as prices are sustained and trading above it.
Target as per Inverse Head & Shoulders pattern is calculated by adding height of head to neckline which comes to 8,888, however one can book profits near previous swing high which is around 8,700.
Entire bullish view negates on breaching of right shoulder on closing basis and one should exit from long position. In case of Nifty Pharma it is placed around 7,601 levels as indicated.
As indicated in the chart above.
(The author is Head – Technical & Derivative Research at Narnolia Financial Advisors Ltd)
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