Palantir Technologies, Inc PLTR plunged 7% on Friday, as the stock broke down bearishly from a head-and-shoulders pattern on the daily chart.
A head-and-shoulder pattern can be either a powerful reversal indicator when found at the top of an uptrend or a continuation pattern found in a downtrend.
The pattern is created when a security forms a rounded arc and then declines (right shoulder) followed by a second steeper arc and accompanying downturn (head) and then by a third arc and decline that is shallower than the second (left shoulder).
The head-and-shoulder pattern has a neckline, which is drawn using a straight ascending, descending or horizontal trendline across the peaks in the pattern.
When the security breaks down through the neckline on higher-than-average volume, it indicates the pattern was recognized and a sharp decline may follow.
- Aggressive bearish traders may choose to enter a security in a head-and-shoulders pattern on the rise following the third arc, with a stop above the highest price in the arc. More conservative traders may wait to enter a position on a break down from the neckline.
- Bullish traders may wait to enter into a position if the security climbs above the highest price within the second arc, which negates the bearish head-and-shoulders pattern and indicates an accelerated move to the upside may follow.
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The Palantir Chart: Palantir completed a head-and-shoulders pattern on Thursday, with the left shoulder formed between July 20 and July 26, the head formed between July 27 and Aug. 9 and the right shoulder formed over the trading days that have followed. On Friday, the stock was reacting to the pattern and falling through the descending neckline but on lower-than-average volume, which indicates there may not be momentum to the downside.
- The loss of downwards momentum may be due to Palantir approaching a long-term descending trendline, which began on Dec. 9, 2021. The stock broke up from the trendline on July 20 and may find support at the area if Palantir continues to fall lower.
- The measured move, if the descending trendline doesn’t hold as support, is about 30%, which suggests Palantir could retrace toward $6.20. If the stock falls that far, bullish traders can watch for a bounce, because by that time Palantir’s relative strength index will have entered into oversold territory.
- Palantir has resistance above at $8.92 and $9.79 and support below at $7.50 and $6.44.
Photo: Courtesy of Cory Doctorow on flickr
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