A Change in Character?
After peaking just before Christmas of last year with negative RSI momentum divergence, NTES, has gone on to fall more than 40% before it bottomed in late May. Since that time, it has begun to make higher highs and higher lows, the indication of a change in character. Price currently sits just under the neckline of an inverse head and shoulders (IHS) bottom reversal pattern and the long-term (red) downtrend line. While price is still under a falling 200 day moving average it recently crossed above its 50dma which has now curled higher. These are all constructive elements an investor would like to see before attempting to catch this falling knife
A confirmed (with higher volume) break and hold above the green horizontal resistance, the upside target for NTES is the March high (at T1), a nice 20%+ gain. A confirmed entry with a stop just below July 11th ‘s low provides a better than 4:1 reward to risk ratio.
While the NTES setup is compelling, the recent move off the right shoulder was not ideal. from a volume standpoint so it makes this IHS pattern suspect. While volume plays an important role in the Head and Shoulders Top, it plays a crucial role in the Head and Shoulders Bottom. Without the proper expansion of volume, the validity of any breakout becomes suspect. Volume levels during the first half of the pattern are less important than in the second half.
- Volume on the decline of the left shoulder is usually pretty heavy and selling pressure quite intense. – Check
- The intensity of selling can even continue during the decline that forms the low of the head. – Check
After this low, subsequent volume patterns should be watched carefully to look for expansion during the advances.
- The advance from the low of the head should show an increase in volume – Check
- After the reaction high forms the second neckline point, the right shoulder’s decline should be accompanied with light volume as it is normal to experience profit-taking after an advance. – Check
Volume analysis helps distinguish between normal profit-taking and heavy selling pressure.
- The most important moment for volume occurs on the advance from the low of the right shoulder. – Sort Of
The most recent advance from the right shoulder started well but is ending with lighter volume than desired. For a breakout to be considered valid, there needs to be an expansion of volume on the advance and during the breakout. While increasing volume confirms the breakout and pattern, just because it isn’t there does not mean the pattern won’t play out to completion, it just means the probability is not as great and why it is suspect.