The head and shoulders (H&S) chart pattern is popular and easy to spot pattern. These patterns are formed due to supply and demand dynamics in the market place.
The H&S pattern is believed to be one of the most reliable and popular patterns in the traders' community. In technical analysis, an inverse H&S pattern describes a specific chart formation that projects a bullish trend reversal.
Why buy GAIL?
An Inverse H&S reversal pattern forms after a downtrend, and its completion marks a trend reversal to an uptrend. In the standard Inverse H&S 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.
GAIL (India) is trading above strong resistance line standing around Rs 126 levels indicating strong bullish bias to continue further. The recent formation of the Inverse H&S pattern has given a breakout by trading above Rs 126 which suggests buying in the stock for higher targets of Rs 138.
RSI trading above 50 marks is also supportive of bullish momentum.
Buy Signal:
- Recent close prices (Rs 127) are trading above the Neckline (Rs 126) of Inverse H&S pattern indicating trend reversal to an uptrend.
- Short-term moving average 20 DMA (Rs 123) defines short-term trend is providing support to buyers as prices are sustained and trading above it.
- Mid-term moving average 50 DMA (Rs 122) defines mid-term trend is very well augur with bulls as prices are sustained and trading above it.
Target as per Inverse H&S' pattern is calculated by adding the height of the head to the Neckline which comes to Rs 142, however one can book profits near previous swing high which is around Rs 138.
Stop Loss:
Entire bullish view negates on breaching of right shoulder on a closing basis and one should exit from a long position. In the case of GAIL (India), it is placed around Rs 115 levels as indicated.
Conclusion
We recommend buying GAIL around Rs 126 and lower towards Rs 122 levels with a stop loss of Rs 116 for higher targets of Rs 138 as indicated in the above chart.
The author is Head - Technical Research at Narnolia Financial Advisors
Disclosure: Narnolia Financial Advisors/Analyst (s) does/do not have any holding in the stocks discussed but these stocks may have been recommended to clients in the past. Clients of Narnolia Financial Advisors Ltd. may be holding aforesaid stocks. The stocks recommended are based on our analysis which is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.
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