Olam’s massive head and shoulders

Evening traders/investors,

Quite a while ago, I posted a post titled “Olam topped?”. Exactly a month ago, Olam gapped down on heavy volume and never filled the gap. Seeing how the sell-off occurred after a big chunk of consolidation, we can consider the gap a breakaway gap. If you have been here long enough, you will know that I do not place much emphasis on gaps. So what is the significance of Olam’s massive sell-off? The heavy selling pressure triggered a technical event: a downward breakout from a head and shoulders pattern. When identifying head and shoulders patterns, I sometimes look for regions of price action. In other words, I look for consolidation ranges. In the chart below, you will see the massive head and shoulders pattern. The 3 regions of price contain very nice consolidation ranges (yellow boxes). The 3 regions, with one region clearly higher than the other two, culminate in what I see as a head and shoulders pattern. This pattern is a confirmed one with a downward breakout. Taking the height of the whole pattern, I get a target of below $1.30. Scary? That is still a good 35% lower level from the close last Friday. A quick check on some pieces of news tells me that Olam’s selldown was probably because of sluggish earnings report and ratings downgrades by the brokerage houses. Immediately after that, Olam’s management announced a share buyback programme resulting in the very recent upward movmeent in price. Whatever it is that is happening out there, as a chartist, I will stick to my projection of further downside for Olam.

One thing I am disappointed in is that I did not signal the potential of a confirmed head and shoulders pattern before breakout occurred, even though the pattern was quite mature. I have been keeping Olam on my watchlist for quite a long time already. Months back, I was starting to see the massive head and shoulders pattern looming. But I doubted the chart, and told myself that sometimes when a pattern is so large – in this case, the pattern started in the latter half of 2009 – it will not work. As I have come to realise, yet conveniently forget over the years, the chart will be correct more times than my gut feeling.

True enough, Olam broke through the strong $2.00-$2.10 support region. Of course, this is not a superb victory for the head and shoulders pattern yet! However, at least a strong breakout occurred, and we have a huge pattern to continue observing in the weeks and months ahead. I will monitor the situation and look for short set-ups in the time to come.

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

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