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Affiliated Computer Services Headed For A Breakdown

Posted: Jun 23, 2009 14:45 PM by Casey Murphy

Tickers in this Article: ACS

The head-and-shoulders pattern is a commonly used chart pattern that is generally regarded as a reversal pattern; it signals that a security is likely to move against the previous trend. This chart pattern must go through four main steps to signal a reversal. The first step is the formation of the left shoulder, which occurs when the security reaches a new high and retraces to a new low. The second step is the formation of the head, which occurs when the security reaches a higher high, then retraces back near the low formed in the left shoulder. The third step is the formation of the right shoulder, which occurs with a high that is lower than the high formed by the head, but is again followed by a retracement to the low of the left shoulder. The pattern is complete once the price falls below the neckline, which is a support line formed at the level of the lows reached at each of the three retracements.

As seen in the chart above, the head-and-shoulders pattern is complete when the neckline is broken; the trend is then considered reversed, and the security should be heading in the new direction (in this case, downward). The point at which the stock breaks below the neckline is when most of the action occurs, but it is important to note that much of the work that goes into finding these patterns is complete days or weeks before the move. Let's take a look at a stock that has spent most of 2009 forming a head-and-shoulders pattern:

Taking a look at the daily chart of Affiliated Computer Services, Inc. (NYSE:ACS), you can see that a well-defined head-and-shoulders pattern has been forming since late January. Traders may choose to add this pattern to their watch lists because a break below the neckline will suggest that the recent buying pressure is reversing. As you can see from the chart below, the next level of support is found near $36.88 (shown by the blue dotted line), which we expect will be the first target for many of the bearish traders. We'd expect most active traders to keep a bearish outlook on this stock until the price is able to close back above the right shoulder (shown as the blue line near $46.25).

For further reading, see Analyzing Chart Patterns: Head And Shoulders.

By Casey Murphy

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Casey Murphy is the senior analyst at Investopedia.com and is a graduate of the University of Alberta School of Business. He specializes in stock analysis and is dedicated to uncovering profitable investment opportunities. Click here to follow Casey on Twitter.

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