Chewy Inc CHWY was sliding almost 5% lower on Thursday in tandem with the S&P 500, which was plunging about 2.3%.
The pet food and products retailer has been in a sharp decline since Aug. 19 after the stock failed to hold above the 200-day simple moving average on the daily chart.
Chewy may also be forming a larger bearish head and shoulders pattern and if the stock breaks down from the neckline over the coming days, Chewy could be in a longer-term flush to the downside.
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 formed when a security forms a rounded or V-shaped 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.
There are a variety of tools one can use for technical analysis, including Ninja Trader. Ninja offers advanced charting and other products as part of its trading suite that is designed to assist investors with navigating the markets. The platform allows its members to automate and execute trades and to test trading ideas through simulation.
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The Chewy Chart: Chewy started to form into a head-and-shoulder pattern beginning on July 5. The left shoulder was created between that date and July 27, the head was formed between July 28 and Sept. 1 and the right shoulder has been forming since.
- If Chewy falls below the descending neckline of the head-and-shoulders pattern on higher-than-average volume, the measured move is about 35%. This indicates the stock could retrace toward the $21 mark.
- Bullish traders want to see Chewy hold above the neckline of the pattern and bounce up from it, which has happened on a number of occasions since the pattern began to print. If the stock bounces up from the level again, the head-and-shoulders will be negated.
- Chewy has resistance above at $36.69 and $44.15 and support below at $29.06 and $22.66.
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