A Head and Shoulders (H&S) pattern is a reversal pattern that forms after an uptrend. The formation of an H&S pattern warns of a potential reversal of the uptrend into a possible downtrend. As with any chart pattern, a trader will usually not want to act on the pattern until the stock “confirms” the pattern. Confirmation is the break of the key level that has been created by the pattern. In the case of an H&S, confirmation would be when the stock breaks the “neckline”.
Wynn Resorts, Limited is a developer, owner and operator of destination casino resorts. The company owns and operates two destination casino resorts. In Las Vegas, Nevada, it owns and operates Wynn Las Vegas, on the Strip and Encore at Wynn Las Vegas. In the Macau Special Administrative Region of the People’s Republic of China it owns and operates Wynn Macau and Encore at Wynn Macau. It has two segments: Wynn Las Vegas (which includes Encore at Wynn Las Vegas) and Wynn Macau (which includes Encore at Wynn Macau). The Wynn Las Vegas resort offers accommodations, amenities and service with 2,716 rooms and suites, including 36 fairway villas and six private-entry villas for guests.
To review the H&S pattern that formed on Wynn Resorts’ stock, please take a look at the 1-year chart of WYNN (Wynn Resorts Limited) below with my added notations:
WYNN has been on an amazing rally since 2009. Over the last 8 months, WYNN has created a very important level at $130 (red), which is also the “neckline” for the H&S pattern (gray). As the pattern has formed, you will notice that the rising volume requirement on the sell-offs (blue) from the “head” and right “shoulder” is in place. Yesterday, WYNN broke the $130 neckline support on HUGE volume, thus confirming the H&S pattern. The stock should be moving lower overall from here.
Chart patterns can also provide price targets. Simply take the height of the overall pattern and add or subtract that amount to or from the breakout or breakdown point to get the minimum price objective. For example, since the H&S pattern for WYNN is $40 high ($170 – $130), WYNN should fall to a minimum of $90 ($130 – $40) now that the stock has broken below the $130 level. Chart pattern price targets are certainly not guarantees, but they are often fulfilled.
The Tale of the Tape: After embarking on a 2-½ year uptrend, WYNN formed a large Head & Shoulders pattern. WYNN confirmed this pattern yesterday by breaking its $130 “neckline” support and the stock should be moving lower overall. A short trade should be entered as close to the $130 level as possible with a stop placed above the $130 level. If WYNN does not provide an entry near $130, traders should analyze the stock for additional entry points.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT