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Wednesday, February 1, 2023

Interpreting the NSE’s Head and Shoulders Pattern

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After a rally that’s pushed Nigerian Stocks up 22 percent in 2 months since the lows it made in early April, the NSE’s All Share Index has completed a formation could see it tumble as much as 10 percent from current levels.

The Index has formed what technical analysts call a “head and shoulders” pattern (see chart), which foreshadows a bullish-to-bearish trend reversal.


In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.

A head-and-shoulders pattern occurs when a price forms three consecutive peaks, the middle being the largest, and indicates a high possibility of a trend reversal.

A 5-year Chart of the Nigerian Stock Exchange (NSE) All share Index reveals a head-and-shoulders pattern that is well-formed, showing a degree of exhaustion.

A true head and shoulders pattern doesn’t occur very often, but when it does, many technical traders believe it’s an indicator that a major trend reversal has occurred. A standard Head and Shoulders pattern is considered to be a bearish setup.

MoneyCentral had in an earlier article warned that stocks were setting up for a correction after a dazzling rally from the Corona induced lows earlier in the year.

Stocks closed down yesterday as the NSE-ASI lost 0.38 percent to close at 25,312.05 points. Market breadth index was negative with 17 losers against 16 gainers.
The NSE Banking Index lost 2.12%, as a result of the losses in Access Bank (-4.79%), ETI (-3.52%), UBA (-2.99%) and Guaranty Trust Bank (-2.00%).
The NSE Oil and Gas Index fell 0.39%, on the back of sell-off in Oando (-3.57%).

The earliest support levels for the NSE-ASI would be at the 50-day moving average near the 23,000 points mark, according to MoneyCentral chart analysis. Expect strong resistance at the 26,000 points level as the 200 day moving average is bearing down on the Index.

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