American Airlines Group, Inc (NASDAQ:AAL) flew up more than 10% higher at one point on Wednesday, after breaking up bullishly from an inverted head-and-shoulders pattern on the daily chart.
An inverted head-and-shoulder pattern can be either a powerful reversal indicator when found at the bottom of a downtrend or a continuation pattern found in an uptrend.
The pattern is formed when a security forms a rounded or V-shaped trough and then rises (right shoulder) followed by a second deeper downturn and accompanying rise (head) and then by a third trough and rise that is shallower than the second (left shoulder).
The inverted head-and-shoulder pattern has a neckline, which is drawn using a straight ascending, descending or horizontal trendline across the peaks in the pattern.
When the security breaks up through the neckline on higher-than-average volume, it indicates the pattern was recognized and a rally may follow.
- Aggressive bullish traders may choose to enter a security in a head-and-shoulders pattern on the rise following the third trough, with a stop below the lowest price in the trough. More conservative traders may wait to enter a position on a break up from the neckline.
- Bearish traders may wait to enter into a position if the security falls below the lowest price within the second trough, which negates the bullish head-and-shoulders pattern and indicates an accelerated move to the downside may follow.
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The American Airlines Chart: American Airlines began settling itself into an inverted head-and-shoulders pattern on Jan. 13 and completed the left shoulder between that date and Feb. 16, the head between Feb. 17 and April 4 and the right shoulder formed between April 5 and Wednesday.
On Wednesday, after the stock completed the pattern by rising up to the descending neckline, the pattern became recognized and the stock shot up through the trendline of the pattern on higher-than-average volume.
- Later Wednesday morning, American Airlines was attempting to break up bullishly through the 200-day simple moving average (SMA). If the stock is able to gain the 200-day SMA as support, it will give bullish traders more confidence going forward because it will indicate the stock is trading in a bull cycle. American Airlines hasn’t traded above the 200-day since Nov. 11, 2021.
- The measured move of the break from the head-and-shoulders pattern is 51%, which indicates American Airlines could soar up toward the $24 level in the future.
- If American Airlines closes the trading day near its high-of-day price, it will print a bullish kicker candlestick, which could indicate higher prices will come again on Thursday. If the stock closes the session with a significant upper wick, it could indicate lower prices will come. If lower prices are in the cards for Thursday, bullish traders could watch for a backtest of the neckline and a reversal candlestick above the area to enter into a position.
- On Wednesday, American Airlines gapped up to start the day, which left an empty trading range between $17.16 and $17.88. Although there is a 90% change the stock falls down to fill the gap in the future, there is also a possibility the empty trading range could be a breakaway gap that won't be filled for a long period of time due to the massive amount of bullish volume.
- American Airlines has resistance above at $19.35 and $20.62 and support below at $18.28 and $16.20, according to Benzinga Pro.
See Also: Here's Why American Airlines Shares Are Moving
Photo: Courtesy American Airlines
