Emerging Inverse Head & Shoulder pattern suggests buying opportunity in Maruti

Shabbir Kayyumi

The head and shoulders chart pattern is popular and easy to spot pattern. These patterns are formed due to supply and demand dynamics in the market place.

The head and shoulders pattern is believed to be one of the most reliable & popular patterns among traders community. In technical analysis, an Inverse head and shoulders pattern describes a specific chart formation that projects a bullish trend reversal.

Why to Buy Maruti Suzuki India Limited (MARUTI)?

An Inverse Head and Shoulders reversal pattern forms after a down trend, and its completion marks a trend reversal to up trend.

Recently, Maruti’s stock price has formed inverse H&S patterns. In the standard Inverse head and shoulders 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.

Maruti is trading above strong resistance line standing around 6099 levels indicating strong bullish bias to continue further.

Recent formation of Inverse Head & Shoulders pattern has given a breakout by trading above 6,100 marks which suggests buying in the stock for higher targets of 6,600.

Volume can also add further insight while trading these patterns. Decent volume participation while giving breakout in Maruti also gives support to this bull thesis.

Figure.1. Inverse Head & Shoulders pattern and Buy signal on MARUTI

Buy Signal:
1. Recent close prices (6,200) are trading above neckline (6,099) of Inverse Head & Shoulders pattern indicating trend reversal to uptrend.
2. Short- term moving average 20 DMA defines short-term trend is providing support to buyers as prices are sustained and trading above it at 6,200 marks.
3. Mid-term moving average 50 DMA (5,855) defines mid-term trend is very well augur with bulls as prices are sustained and trading above it around 6,200 marks.

4. Decent volume participation while pattern breakout is also giving additional confirmation.

Profit Booking:

> Target as per Inverse Head & Shoulders pattern is calculated by adding height of head to neckline which comes to 6,600, however one can book profits near previous swing high which is around 6,545.

Stop Loss:

> Entire bullish view negates on breaching of right shoulder on closing basis and one should exit from long position. In case of Maruti it is placed around 5,815 levels.

Conclusion

> We recommend buying Maruti Suzuki India Limited (MARUTI) around 6,200 and lower towards 6,099 levels with a stop loss of 5,815 for higher targets of 6,600 as indicated in above chart.

(The Author is Head - Technical & Derivative Research at Narnolia Financial Advisors.)

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