Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Why AMD's Head & Shoulders Top Formation Was Just A Head Fake

By Mike PaulenoffStock MarketsAug 09, 2021 12:17AM ET
www.investing.com/analysis/why-amds-head--shoulders-top-formation-was-just-a-head-fake-200597144
Why AMD's Head & Shoulders Top Formation Was Just A Head Fake
By Mike Paulenoff   |  Aug 09, 2021 12:17AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Probably the first price pattern both fundamental and technical investors learn to recognize is a Head and Shoulders Top. Rightly or wrongly, it is the Holy Grail of technical formations, striking fear into holders of the stock, index, ETF, or commodity that exhibits such a technical set up, while eliciting an opposite reaction from put owners and short sellers who anticipate huge gains captured by impending weakness.

Truth be told, from my experience over 4 decades of market-watching and analysis, after viewing tens of thousands of chart set-ups (designating me an "expert" master technician, according Malcolm Gladwell's criteria discussed in his 2011 book, Outliers), I can report that the most highly recognized Head and Shoulders Top Formation is also the pattern least likely to do what it is supposed to do.

Of course, at some point, most every student of the markets inadvertently learns the old Joe Granville truism, "if it's obvious, it is obviously wrong," which certainly applies to amateur and professional investor recognition of the "mighty" Head and Shoulder Top! The more investors and traders who see it, the less likely it will behave like a top.

Learning the hard way, early in my career I discovered that expecting and positioning ahead of a breakdown from a Head and Shoulders Top almost always resolved itself in a VERY POWERFUL MOVE IN THE OPPOSITE DIRECTION. Moreover, I noticed time and again, that if the reversal upmove off of the neckline support plateau was powerful enough to propel the price structure up and over the high of the right shoulder, then upside continuation occurred in a very high percentage of the Head and Shoulder failures.

In other words, short covering and new buying combine to propel prices much higher, and, in the vast majority of instances, up and over the high price established at the former Head of the top pattern.

All of which brings me to the behavior of Advanced Micro Devices, Inc. (NASDAQ:AMD) since its mid-May 2021 failure to break the neckline of an 11-month distribution top formation that certainly exhibited the artwork of a Head and Shoulders formation.

On May 14th, with AMD peering into the abyss from the neckline of a multi-month Head and Shoulders pattern, I alerted MPTrader members to the following set up:

"I regard AMD's near and intermediate term technical set up as a litmus test for the semiconductor sector. Why? Because my intermediate term work argues that all of the price action since last September (2020) represents a Distribution Top formation that implies much lower targets in the upcoming weeks while my nearer term work indicates that AMD established a consequential low at 72.50 yesterday morning. Off of the 72.50 low, where AMD was staring into the abyss beneath the multi-month "Neckline" support plateau, buyers swooped in to "save the day," at least for now. Judging by the positive juxtaposition of my 4 hour Momentum gauges with the "curled up" price structure, AMD should be in the grasp of a near term recovery rally within the larger multi-month bearish set up. AMD needs to chew through heavy resistance from 76.00 to 79.60 to inform us that we should be second-guessing the likelihood of the larger bearish corrective set up... Last is 74.61."

Indeed, from that day forward, AMD clawed its way higher, above the peak of the Right Shoulder at 89.90, which invalidated the Head and Shoulders Top.  It also triggered technical buy signals in my work that pointed to upside continuation towards a test of the high price established at the Head of the former Head and Shoulders Top formation, in the vicinity of 99-100, and projecting to a new ATH target of 105-108, as I noted to members on July 1.

Fast-forward to the morning of July 30th, and AMD hit a new ATH at 106.54, moving my next target range up to the 115-119 region.  AMD spiked to a high of 122.49 this past week (on Wednesday, Aug. 4), nearly 69% above where it failed to breakdown from the Neckline at 72.50 in mid-May, and 64% above our first alert to MPTrader members that the trusty old Head and Shoulders Top formation might not be all that trustworthy after all.

Experience matters in these markets. AMD is a case study in pattern recognition, as well as recognition of pattern failure, and what to expect thereafter.

AMD 4-Hr Chart
AMD 4-Hr Chart

Why AMD's Head & Shoulders Top Formation Was Just A Head Fake
 

Related Articles

Why AMD's Head & Shoulders Top Formation Was Just A Head Fake

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email