Shares of Macy's (M) have been consolidating in a bullish inverse head and shoulders formation for the last two months and look poised to break pattern resistance and reverse a long term downtrend.
Macy's saw a precipitous drop from its July 2015 high to its December low later that year, losing half of its value in the five-month decline. It has been undergoing a more constructive process for the last two months, however, defining a rounded bottom and forming an inverse head and shoulders pattern. These patterns are usually seen at important technical lows and are considered reliable reversal patterns. The left shoulder formed in November, the head formed at the December low, and the right shoulder formed over the last two weeks, all under the horizontal neckline at the $40 level.
During this period of consolidation, the relative strength index has been moving higher and is above its centerline, and the daily moving average convergence/divergence averages, which are overlaid on a weekly histogram of the oscillator, are above their centerlines. These positive multiple timeframe indications represent improving short-term trend and price momentum, and they are supported by penetration this week of the downtrend line drawn off the highs since July and the 50-day moving average.
Additionally, there has been a cluster of strong volume bars this month, above the 50-day moving average of volume, and the money flow indictors are turning positive. Accumulation/distribution is crossing above its 21-period signal average, and Chaikin money flow, a 21-period average of the A/D line, has moved into positive territory. These readings reflect buying interest in the stock at current levels.
Macy's is a long candidate after an upper candle close above the $40 neckline using an initial stop under the right shoulder of the pattern.