Shares of Ameren Corporation (NYSE:AEE) Form a Head and Shoulders Pattern, What’s Next?  The stock currently sits at $48.48.

A “head and shoulders pattern” is the pattern on a financial chart with a series of ups and downs which literally resembles two shoulders and a head.  The pattern consists of three parts.  1.) After a long rising trends, the price comes to a peak and then declines to form a valley.  2.) The price then rises again to form a second high peak substantially higher than the first peak and then declines again.  3.) The price rises for a third time, but only to the level of the first peak, before falling once again.  The first and third peaks form the “shoulders”, and the second peak forms the “head”.  Head and shoulders patterns often times signal that a downward trend is about to reverse. 

As all charting patterns do, the ups and downs of the head and shoulders pattern give us a specific story of the war being fought between the bulls and the bears.  The first peak and subsequent fall represent the slowing momentum of the previous bullish trend.  Desiring to sustain the upward movement as for as long as possible, the bulls rally to prop the price up beyond the initial peak, reaching a new high, forming the “head”.  Here we see that at this juncture it is still possible that the bulls reinstate their market power and sustain the upward trend.

Though once the price declines a second time and reaches a point lower than the initial peak, it is obvious that the bears are picking up ground.  Bulls make one last push to move the price upward, but are only successful in hitting the lesser high reached at the initial peak. The failure to beat the highest high indicates that the bulls are defeated and that’s when the bears dominate, driving the price down to complete the reversal.

TECHNICAL ANALYSIS

Technical analysts have little regard for the value of a company. They use historic price data to observe stock price patterns to predict the direction of that price going forward.  Analysts use common formulas and ratios to accomplish this.

Ameren Corporation (NYSE:AEE)’s RSI (Relative Strength Index) is 45.07.  RSI is a technical indicator of price momentum, comparing the size of recent gains to the size of recent losses and establishes oversold and overbought positions.

SIMPLE MOVING AVERAGE

The simple moving average is the most common method used to calculate the moving average of prices.  It takes the sum of all of the past closing prices over a specific time period and divides the result by the number of prices used in the calculation.  Increasing the number of time periods in the calculation is an effective way to ascertain the strength of the long-term trend and/or the likelihood that it might reverse.  Some argue that this type of average is not necessarily useful because each data point in the series has the exact same impact on the result no matter where it occurs in the sequence.  Ameren Corporation’s 20-Day Simple Moving Average is -1.12%.  Extending back, their 50-Day Simple Moving Average is -1.02%, looking even further back, their 200-Day Simple Moving Average stands at -0.71%. 

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