Take a look at the 1-year chart of Merrimack (Nasdaq: MACK) below with my added notations:
Over the last 4 months MACK had created a key trendline of support (green), which was also a prior resistance, and that level was also the “neckline” support for the stock’s head and shoulders (H&S) reversal pattern. Above the neckline you will notice the H&S pattern itself (red).
Remember, patterns such as an H&S need to confirm to have the meaning that they imply. Confirmation of the H&S occurred when MACK broke below its trendline support.
The Tale of the Tape: MACK has confirmed a head & shoulders pattern. A short trade could be entered anywhere near the prior trendline with a stop placed above that level. A break back above that trendline could negate the forecast for a move lower, thus a long position could be considered instead.
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