Chewy Stock Slides, Heads For This Trendline: What's Happening?

Zinger Key Points
  • Chewy has been forming into a long-term head-and-shoulder pattern on the daily chart.
  • If the stock breaks down from the neckline of the pattern, Chewy could flush toward the $21 mark.
Chewy Stock Slides, Heads For This Trendline: What's Happening?

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.

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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.

See Also: It's Not Just Groceries, Pets Costs Are Higher: How To Budget Amid Soaring Inflation

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