Will Lighting Strike Twice?

Much of our understanding of chart patterns can be attributed to the work of Richard Schabacker. His 1932 classic, Technical Analysis and Stock Market Profits, laid the foundations for modern pattern analysis. In his book, Schabacker refers to “the science of chart reading”, but technical analysis can at times be less science and more art. This is because pattern recognition can be open to interpretation, which can be subject to personal biases, the hobgoblin of even the best investors. In spite of this I find them and the reason behind them one of the most fascinating and fun pieces of the technical analysis puzzle.  This is because not only do they provide an excellent framework to manage risk but when they work, they can be a thing of beauty as you can see in the chart of Ascendis Pharma, ASND, below.

I have found that basing patterns that extend between 6-12 months have the highest probability of success. You can see in its first consolidation February and September (7 months), price formed a very symmetrical inverse head and shoulders pattern (noted in green). The target for all target for this pattern is the distance between the head and the neckline (the lower green vertical bar), added to the neckline (T1).  As you can see, price closed within pennies of its target on the breakout.  As it turned out, that burst higher was all the bulls had as price pulled back and began to, once again consolidate and form another inverse head and shoulders pattern (noted in purple).

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While price has not yet broken and held above the upper purple neckline to confirm the pattern, if it does the target is up around $42.16 some 15% higher.  It would be great to see TA lightning strike twice in a row for ASND shareholders, but because the pattern’s base will be much less than the preferred 6 months minimum, the odds of success are a notch lower than before.

There are pattern experts who will scoff at this post because I have labeled the pattern as an inverse head and shoulders (IH&S). Technically they are correct because, IH&S patterns only form in downtrends. As such both of these patterns for ASND should be labeled as a cup and handle (which is essentially the same pattern as an IH&S except it is formed in an uptrend). So please pardon the intentional mislabeling.