Take a look at the 1-year chart of Caterpillar (NYSE: CAT) below with my added notations:
Over the last 6 months CAT has created a key level of support at $100 (red), and that $100 level is also the “neckline” support for CAT’s head and shoulders (H&S) reversal pattern. Above the neckline you will notice the H&S pattern itself (blue). This pattern implies an eventual breakdown for the stock.
Remember, patterns such as an H&S need to confirm to have the meaning that they imply. Confirmation of the H&S would occur if CAT were to break below its $100 support.
The Tale of the Tape: CAT seems to have formed a head & shoulders pattern. Although a long trade could be made at $100, the pattern points towards a break lower. A short trade could be entered on a solid move below the $100 “neckline” support, with a stop placed above that level.
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