Over the past month it was mentioned that Canopy Growth TSX:WEED; NYSE:CGC) had a very bullish chart patterns and would likely break out in January and CGC broke out today from its Inverse Head and Shoulders chart formations gaining 12.51% and 8.91%, respectively.
What is an Inverse Head and Shoulders Chart Pattern?
You may have heard of the standard Head and Shoulders pattern which is used to determine if a stock has topped out. The Inverse Head and Shoulders pattern is the inverted version of the standard H & S formation and is used for spotting stocks that are ready to reverse a downtrend and begin a new uptrend.
The Inverse H & S pattern is made up of the following components:
- Shoulder: Following a long downtrend, the price of a stock drops to a trough forming the first shoulder and afterwards rises to form a peak.
- Head: The stock’s price drops again to form a second trough which is considerably lower than the previous low forming the head of the pattern followed by the stock rising again.
- Shoulder: The price of the stock drops again for the third time to roughly the same level as the first trough forming the second shoulder followed by the stock rising one more time to break out above the resistance neckline of Inverse Head and Shoulders pattern.
- Volume: Look for a spike in volume as the stock breaks out above the neckline. Volume is more important with the Inverse Head and Shoulders pattern than it is with the standard version. Strong volume will confirm the breakout’s validity. The higher the volume spike the better.
Now that we have a better idea of what is driving these stocks higher and how an Inverse Head and Shoulders pattern looks and works, let’s take a closer look at both charts and calculate the price targets for each breakout.
Calculating Price Targets
To calculate the price target of an Inverse Head and Shoulders pattern we need to measure the distance from the bottom of the ‘Head’ to the ‘Neckline’. We then take that distance and add it to the breakout point on the neckline and it will give us our estimated price target.
- Price Target Formula: Neckline (N) – Head (H) + Neckline (N) = Price Target (PT)
Canopy Growth (NYSE: CGC) Price Action and Chart
- Canopy Growth (CGC) formed ‘Shoulder #1’ of its Inverse Head and Shoulders pattern when CGC stock touched a low of $17.89 on October 14, 2019.
- CGC then rallied temporarily before declining again to an even lower point of $13.81 on November 19, 2019, forming the ‘Head‘ of the pattern.
- CGC rallied sharply from that low before consolidating sideways until the stock declined for a third time to a level equal to shoulder #1 thus creating ‘Shoulder #2’.
- Finally, CGC broke out above the ‘Neckline’ at $22.25 today on a solid increase in volume. Importantly, the stock closed well above the neckline and only $0.09 off the high of the day (HOD).
CGC Price Target
- Neckline = $22.25
- Head = $13.81
- $22.25 (N) – $13.81 (H) + $22.25 (N) = $30.69 (PT)