SoFi Technologies Inverse Head and Shoulders Breakout ~$12 PT
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The Inverse Head and Shoulders pattern is a classic technical analysis pattern that signals a reversal in trend from bearish to bullish. It is the exact opposite of the Head and Shoulders pattern which indicates a bearish trend reversal.
Here's a detailed description of the Inverse Head and Shoulders pattern with key indicators:
1. Formation: This pattern is characterized by three consecutive troughs with the middle trough being the deepest (the "head") and the two outside troughs (the "shoulders") being shallower. Ideally, the two shoulders should be roughly the same distance from the head and there should be a noticeable downward trend in progress.
2. Neckline: The pattern is framed by a "neckline" drawn by connecting the high points of the two troughs. The neckline serves as the level of resistance that price must break through for the pattern to be considered complete.
3. Volume: Volume plays a crucial role in identifying this pattern. During the formation of the pattern, volume tends to be higher during the descent into the left shoulder, lower during the formation of the head, and increase again during the rise of the right shoulder. A noticeable increase in volume on the break above the neckline confirms the pattern.
4. Relative Strength Index (RSI): The RSI is often used to confirm the pattern. The RSI, which ranges from 0 to 100, is a momentum oscillator that measures the speed and change of price movements. During the formation of the pattern, the RSI might become oversold (below 30) as the head forms and then start to rise as the right shoulder develops. A break above the neckline often coincides with the RSI climbing above 50, which is a bullish signal.
5. Duration: The formation of an Inverse Head and Shoulders pattern can take several weeks to several months. The longer the pattern takes to develop, the more significant the potential price reversal.
6. Conclusion and Breakout: The pattern is confirmed when the price breaks above the neckline, preferably on higher volume. After the breakout, the price may retest the neckline (now acting as a support level), before continuing its upward move. This is referred to as a "throwback".
7. Price Target: The projected price target is found by measuring the distance from the neckline to the bottom of the head. This distance is then projected upwards from the breakout point at the neckline to provide a price target.
The Inverse Head and Shoulders pattern, while a powerful tool, is not foolproof. It should be used in conjunction with other technical indicators to validate and confirm signals, reducing the risk of false positives. Additionally, market fundamentals should not be overlooked while considering potential trades based on this pattern.
Here's a detailed description of the Inverse Head and Shoulders pattern with key indicators:
1. Formation: This pattern is characterized by three consecutive troughs with the middle trough being the deepest (the "head") and the two outside troughs (the "shoulders") being shallower. Ideally, the two shoulders should be roughly the same distance from the head and there should be a noticeable downward trend in progress.
2. Neckline: The pattern is framed by a "neckline" drawn by connecting the high points of the two troughs. The neckline serves as the level of resistance that price must break through for the pattern to be considered complete.
3. Volume: Volume plays a crucial role in identifying this pattern. During the formation of the pattern, volume tends to be higher during the descent into the left shoulder, lower during the formation of the head, and increase again during the rise of the right shoulder. A noticeable increase in volume on the break above the neckline confirms the pattern.
4. Relative Strength Index (RSI): The RSI is often used to confirm the pattern. The RSI, which ranges from 0 to 100, is a momentum oscillator that measures the speed and change of price movements. During the formation of the pattern, the RSI might become oversold (below 30) as the head forms and then start to rise as the right shoulder develops. A break above the neckline often coincides with the RSI climbing above 50, which is a bullish signal.
5. Duration: The formation of an Inverse Head and Shoulders pattern can take several weeks to several months. The longer the pattern takes to develop, the more significant the potential price reversal.
6. Conclusion and Breakout: The pattern is confirmed when the price breaks above the neckline, preferably on higher volume. After the breakout, the price may retest the neckline (now acting as a support level), before continuing its upward move. This is referred to as a "throwback".
7. Price Target: The projected price target is found by measuring the distance from the neckline to the bottom of the head. This distance is then projected upwards from the breakout point at the neckline to provide a price target.
The Inverse Head and Shoulders pattern, while a powerful tool, is not foolproof. It should be used in conjunction with other technical indicators to validate and confirm signals, reducing the risk of false positives. Additionally, market fundamentals should not be overlooked while considering potential trades based on this pattern.
Nota
Reasserting my thesis on the inverse head and shoulders pattern for SoFi, the stock's recent moves have steadfastly reinforced this analysis. We have seen an explosive surge in volume, which emphatically underscores a potent and decisive breakout above the neckline. Notably, the stock has not retraced back to test the neckline yet, and it is feasible that it might not need to in this instance. The macroeconomic backdrop also appears favorable for a sustained rally in SoFi's share price. Given the recent low inflation numbers—two-year lows, to be precise—and the anticipated pause in Federal Reserve rate hikes, these tailwinds should lend broad-based support to the overall market. SoFi, as a growth-oriented fintech in the banking sector, stands to benefit substantially in this climate.
The adage 'the wider the base, the higher in space' comes to mind. If the inverse head and shoulders pattern holds true, SoFi might ascend significantly higher than typical expectations for such a pattern. This projection considers the protracted downtrend that marked the formation of the left shoulder, tracing its genesis back to January 2021, over 18 months ago.
Adding to these compelling dynamics, a lingering but dwindling short interest—still exceeding 10%—could also serve as a potential catalyst for a short squeeze, propelling SoFi beyond the predicted $12 mark. This could see the stock test levels not witnessed since the latter half of 2021, positioning an ambitious price target at around $14.
At this juncture, the stock could experience a pullback to retest the $10 or high $9 levels. Alternatively, these levels could transform into a robust support base, propelling the stock back into the trading channel established in the wake of the SPAC merger. All told, the converging factors present a compelling case for SoFi's potential upside, reconfirming my confidence in the inverse head and shoulders pattern.
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