Raytheon's Rally Is Over -- How Low Will It Go Now?

Shares of the aerospace and defense products manufacturer Raytheon (RTN) rallied 24% off their January low this year to their August high, but recent price action has formed a large head and shoulders topping pattern on the chart. A neckline breakdown could see it retrace half of those gains.

The daily chart shows the stock breaking out of a wedge or symmetrical triangle pattern in March and then making a steady series of higher highs and higher lows, in the process forming a strong uptrend line that moved along in tandem with the rising 50-day moving average. Price momentum began to fade last month, and a rounded top formed that retested and then broke through the uptrend line and the 50-day average. The pullback found support at the 23.6% Fibonacci retracement level of the rally range, and the stock attempted to recover its momentum, forming a short-term uptrend line that ran parallel to the longer-term trend line. Thursday's 2% decline took the stock down through the short-term trend line and back to the first Fibonacci retracement.

The price action over the last three months has formed a head and shoulders top, with the movement in July forming the left shoulder, the August rounded top marking the head of the pattern, and the price action this month forming the right shoulder. The stock is currently sitting right on neckline support. The relative strength index is below its center line and moving lower, and moving average convergence/divergence is making a bearish crossover. Chaikin money flow dropped into negative territory this month, and the accumulation/distribution line is moving below its 21-period signal average. These are not encouraging momentum or money flow readings for shares going forward.

Raytheon is a speculative short after a break below the neckline using a trailing protective buy-to-cover stop. The price target of the head and shoulders formation is measured by taking the height of the pattern and subtracting it from the neckline breakdown point. In this case, in projects down below the 200-day moving average to the 50% retracement level of this year's range.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

More from Stocks

Finding Stocks Right for You: Cramer's 'Mad Money' Recap (Friday 8/25/18)

Finding Stocks Right for You: Cramer's 'Mad Money' Recap (Friday 8/25/18)

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Week Ahead: Wall Street Looks to Jobs Report as North Korea Meeting Less Certain

Week Ahead: Wall Street Looks to Jobs Report as North Korea Meeting Less Certain

Dow and S&P 500 Decline, Energy Shares Fall as U.S. Crude Oil Slides 4%

Dow and S&P 500 Decline, Energy Shares Fall as U.S. Crude Oil Slides 4%

Replay: Jim Cramer on the Markets, 10-Year Yield, Oil Prices and Foot Locker

Replay: Jim Cramer on the Markets, 10-Year Yield, Oil Prices and Foot Locker