From the short-term distribution pattern in Nvidia to the potential breakdown in Apple (AAPL) , there is no shortage of large cap technology names showing signs of weakness. But despite the struggles of the largest stocks in the sector, Block (SQ) appears to breaking above a key resistance level. We'll break down this breakout strategy on the weekly chart and also use the daily chart to consider downside risk using a recent price gap. A quick review of the weekly chart of Block shows a clear inverted head and shoulders bottoming pattern, represented by a low in October 2023 surrounded by higher lows in May 2023 and January 2024. There is a well-defined neckline that is formed using the interim highs between the "head" and the two "shoulders," which sits around the $80 level. The key with a head and shoulders pattern is to wait for the "trigger", which is when the price actually breaks through the neckline. This confirms that the pattern is valid and initiates a breakout signal. This week, SQ has powered above $80, completing this pattern and suggesting much further upside for this payment processor. What's the upside potential for a chart like Block? The most common measurement technique to project a minimum upside objective is to measure the distance from the top of the head to the neckline, and add that amount to the neckline value. In this case, we reach a minimum upside objective around $160, which would take SQ well above the 150-week moving average and just above the March 2022 high. Now with any projection technique, there is a possibility that the signal is a false one, so we need to assess potential downside risk. The daily chart can provide a good way to evaluate short-term market noise as opposed to a real breakdown in price action. Here we can see that the recent breakout above the neckline was preceded by a price gap higher in February. Immediately after the price gap, SQ dropped down to around $75, a level which was retested again in early March. So while initial price support should be considered at the neckline level around $80, I would expect further support around $75 given this recent price gap. Lower on the daily chart, you may notice that the price momentum has remained strong in the form of an relative strength index well above 50, and improving relative strength which confirms Block has been outperforming the S & P 500 over the last couple weeks. With inverted head and shoulders breakout on the weekly chart, and clearly defined risk levels on the daily chart, Block may just be worth investors' attention. And given the clear weakness in mega cap names like AAPL, a breakout name in the technology sector could provide upside in the face of weakness in the Magnificent 7. -David Keller, CMT marketmisbehavior.com DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
