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Tickers in this Article: K

The head-and-shoulders pattern is one of the most commonly used chart patterns in active trading. It is often used to predict a reversal in a prolonged uptrend. Sell signals are generated once the price breaks below an established level of support known as the neckline (shown by the horizontal line). As you can see from the chart below, the close below the neckline in early January did result in a sharp correction, but the trend did not reverse like many traders were expecting.

The reason we've chosen to take a look at the chart of Kellogg Co (NYSE:K) is because the bulls recently pushed the price above the neckline, which suggests that the stock may be positioned to make a move higher. Notice how the neckline changed from a level of support into a level of resistance once the bulls responded to the pullback. This retest of the neckline, also known as a throwback, is a common retracement that occurs before the trend continues lower. In this case, the stock moved back above the trendline (shown by blue arrow) and did not bounce off it, which we believe will cause many bearish traders to reverse their positions. We'd expect the nearby trendline to act as a level of support and will watch for a move toward the swing high of $54.15. Once the price is able to break above the nearby high we'd expect bullish traders to set their short-term targets near the right shoulder ($55).

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