Every trader should have a few go-to setups in their toolbox…
The kind that when you spot it on a price chart, you know you’re likely to score.
Because for technical analysts, good trading is all about pattern recognition.
Of course, it’s also important for those patterns to have predictable outcomes.
But remember this – nobody ever takes a trade expecting it to be a loser.
Ultimately, trading is a game of probabilities. Even the best setups will fail occasionally.
So, our goal is to stack the deck in our favor as much as possible.
My Favorite Chart Setup
One of my go-to setups is a chart pattern called the head-and-shoulders.
I like it because it’s easy to spot, and consistently allows me to spot the next change in momentum.
So, today we’ll take a look at the iShares Biotechnology ETF (IBB).
IBB tracks the performance of the Nasdaq Biotechnology Index. It’s mostly made up of large-cap biotech companies like Amgen (AMGN), Gilead Sciences (GILD, and Regeneron Pharmaceuticals (REGN).
Now, let’s look at the head-and-shoulders pattern on the IBB price chart below…
I’ve outlined three key characteristics of this pattern…
First, we have the left shoulder, which formed in March 2022 when IBB attempted to rally. This rally quickly stalled at around $135, leading to a sharp decline over the next several weeks.
IBB finally found support around the $105 level in June, forming the head of the pattern. The market then rallied once more, eventually finding resistance back at $135.
The ensuing decline found support around $113 in September, forming the right shoulder.
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Once the two shoulders and the head of the pattern are in place, it’s possible to draw the neckline (blue line). It’s a trendline that connects the left and right shoulders.
The head-and-shoulders pattern is complete once prices break beyond the neckline.
For IBB, prices broke through the neckline on November 30.
Now that the breakout is underway, I wouldn’t be surprised to see IBB return to its November 2021 peak of $164. That’s over a 20% move from the neckline of the pattern.
While my go-to head-and-shoulders pattern won’t always be on beaten-down sectors, they’re often the most lucrative.
And once the trend is in motion, I can comfortably place a trade in that direction.
In this case, biotech has taken a hard hit this year. So, the potential upside in IBB is quite exciting.
Traders should look to go long biotech in the short term.
Analyst, Market Minute
What are some of your best go-to setups on a chart?
Let us know your thoughts – and any questions you have – at [email protected].