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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.
Raytheon Company provides electronics, mission systems integration, and other capabilities in the areas of sensing, effects, and command, control, communications, and intelligence systems, as well as a range of mission support services in the United States and internationally. The company offers integrated defense systems that include integrated air and missile defense, radar solutions, and naval combat and ship electronic systems. It also provides missile systems, including air warfare, air and missile defense, naval weapon, land combat, advanced missiles and unmanned systems, and advanced security and directed energy systems. In addition, the company offers network centric systems that comprise integrated communications systems. Further, it provides space and airborne systems (SAS), such as intelligence, surveillance and reconnaissance systems; tactical airborne systems; space systems; and other SAS product lines. Raytheon Company provides its systems and solutions primarily to the U.S. Intelligence Community, Department of Defense agencies, the National Oceanic and Atmospheric Administration, the Department of Homeland Security, the Federal Bureau of Investigation, and the National Aeronautics and Space Administration, as well as sells to foreign military customers. The company was founded in 1922 and is based in Waltham, Massachusetts.
To review the H&S pattern that has formed on Raytheon’s stock, please take a look at the 1-year chart of RTN (Raytheon Company) below with my added notations:
RTN has rallied nicely from its November 2011 low all the way up to its $58 peak in September. Over the last several months though, the stock looks like it is going through a topping process while having created a key price level at $54 (brown). The $54 support looks like what would be the “neckline” for an H&S pattern. Above the neckline you will notice the H&S pattern itself (lt. blue). Confirmation of the H&S would occur if RTN broke its $54 neckline support. If that happens, the stock should be moving lower from there.
The Tale of the Tape: RTN has formed a Head & Shoulders pattern. Although the $54 support may hold for long trades, the pattern implies an impending break lower. A break of the $54 neckline support 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