The Canadian fertiliser producer, Potash Corporation, is poised to break out of a very nice Inverse Head and Shoulders pattern, which could produce a decent trading opportunity.
Recognising The Pattern
The Inverse Head and Shoulders pattern, also known as the Head and Shoulders Bottom, shares many of the characteristics of the Head and Shoulders Top pattern, such as the one formed by the FTSE last summer.
As a major reversal pattern, the Head and Shoulders Bottom forms after a downtrend, and its completion marks a change in trend. The pattern contains three successive troughs with the middle trough (the head) being the deepest and the two outside troughs (the shoulders) being shallower. Ideally, the two shoulders would be equal in height and width. The two highs in the middle of the pattern can be connected to form the resistance, or a neckline.
The key difference between the Head and Shoulders Bottom pattern and the Head and Shoulders Top, is that the Bottom pattern relies more heavily on volume for confirmation. While an increase in volume on the neckline breakout for a Head and Shoulders Top is welcomed, it is absolutely required for a bottom.
A 3 Month Chart Of Potash Corp.
Chart courtesy of Stockcharts.com
In order for this trade to pan out, I would like to see a decisive breakout above the neckline on high volume. I would then expect the price to dip to retest the neckline, which would switch from being resistance to being support. The price should then advance to my price target at around $50.
Calculating The Price Target
The projected price target is found by measuring the distance from the neckline to the bottom of the head. This distance is then added to the neckline to reach a price target. Any price target should serve as a rough guide, and other factors should be considered, as well. These factors might include previous resistance levels, Fibonacci retracements or long-term moving averages.
I will keep an eye on this pattern and write more about it in the coming days.