NI Chart Nov. 28, 2011

NI is suspected to be trading in a bullish Inverted Head and Shoulder formation and might be in a Cup and Handle pattern to others.  Note that for this pattern to have some form of legitimacy, four things must be present: a neckline (breakout point), head, symmetry between left and right shoulder and a good volume on the right shoulder. As such, all four are present in the chart above.

Knowing that a possible Inverted Head and Shoulder pattern exist won’t be enough if we are to try to deduce future price action of a stock. We will have to go further and look at the underlying formation hidden inside the general pattern. Let’s begin; a closer look at the right shoulder of the Inverted H&S formation reveals that there are two more patterns within.  One is the  uptrending “Rectangular Channel” denoted by solid black line (upper border) and the broken black line (lower border). The other pattern which is the   bearish “Ascending Triangle” as shown by the  blue lines is seen within the “Rectangular channel” formation. Basically what we have here is a pattern within a pattern.

Now that we are aware of the patterns involve in this stock, let us now discuss the resistance, support and possible future price action that the stock may take.

Scenario #1 (A-B-C movement)

Under this scenario, stock will trade within “up-trending channel” seen at the “right shoulder”. The stock price is expected to break above the strong resistance found at  4.45-4.67 (letter A) which is the neckline of the Inverted H&S pattern. It will then move towards the next resistance seen between 5.37-5.50 area (letter B) where profit taking will occur. Price will then retreat just above the neckline area (letter A). It will then resume its uptrend movement and march towards 6.00 where price level target is expected to be completed. This is the most bullish of all scenarios.

Scenario #2 (A-D-C movement)

Here NI is expected to test major resistance levels found between 4.45 -4.67 (letter A) but will fail to break above on the first attempt. The overall bearish tone of “Ascending Triangle” pattern will lead to a price pullback towards 4.08 or 3.85. (letter D). Attempts made to break above the neckline resistance (letter A) will be seen to become successful on the 2nd or 3rd try. After breaking above, the stock price will then track the movement under scenario # 1 which will eventually move towards the target price seen at 6 (letter C).

In summary:

4.45-4.67 – initial resistance

5.37-5.50 – secondary resistance

6.00 – possible target resistance

4.04-4.13 – initial support

3.75-3.85 – secondary support

Remember once resistance is broken, it becomes a support and vice versa. The most crucial area to take into account is the neckline found between 4.45-4.67 (letter A)…bull above and bear below. Lastly, all bets are off at the close below 3.75 level.