Chart patterns in Cummins India and LIC Housing Finance

Cummins India- Head & Shoulders pattern

What is a Head and Shoulders pattern?

A head and shoulders pattern indicates a bullish-to-bearish trend reversal. The chart pattern consists of three highs where the outer two highs are similar in height, and the middle-high is the highest. After a long bullish trend, the price rises to a high (left shoulder) and declines to form a low. The price rises again, creating a higher high (head) and declines to make a low. Finally, the price rises for the third time (right shoulder) but is unable to cross the high made by the head. The trendline connecting the two lows is called the neckline (marked in yellow).

Pattern implications

The head and shoulders pattern indicates that the existing upward trend could soon end. The downtrend is signaled when the neckline is broken and the price closes below it. 

Preferred strategy

A trader can initiate a bear put spread strategy based on this technical pattern. In this strategy, a trader can buy an ATM (at-the-money) put option and sell a slightly far away OTM (out-of-the-money) put option, both belonging to the same expiry. The sell OTM put option acts as a hedge to the buy ATM put option, thereby capping a trader’s profit or loss to a certain level. 

LIC Housing Finance- Double Top pattern

What is a Double Top pattern?

A double top is a bearish reversal technical pattern that forms after the price reaches the same high twice with a moderate decline between the two highs. In the above example, we can see that the price of LIC Housing Finance has made a double top pattern around ₹395 price level (represented by the white line). 

Pattern implications

After making a double top, if the stock moves lower and closes below its previous swing low (represented by the blue line), a downtrend is expected. In certain cases, the two highs may not be at the same level, but are in the same price zone. A double top pattern, followed by a break and close below the previous low, gives a higher probability of a downtrend. Waiting for this confirmation is a better way to trade this strategy. 

Preferred strategy

A trader can initiate a bear put spread strategy based on this technical pattern. In this strategy, a trader can buy an ATM (at-the-money) put option and sell a slightly far away OTM (out-of-the-money) put option, both belonging to the same expiry. The sell OTM put option acts as a hedge to the buy ATM put option, thereby capping a trader’s profit or loss to a certain level. 

Disclaimer

Derivatives trading must be done only by traders who fully understand the risks associated with them and strictly apply risk mechanisms like stop-losses. 

We do not recommend any particular stock. The stock names mentioned in this article are purely for showing how to do analysis. Take your own decision before investing.