Sovereign Bank (SOV) -- An Update

Last month (March 13) we looked at Sovereign Bank (SOV) as being a potential candidate for an inverse head and shoulders formation. I was excited at finding it because as the normal formation is fairly rare in itself, the inverse pattern is even more uncommon. A colleague of mine, Carl, who heads a local hedge fund, said he didn't quite share my enthusiasm. He was chomping at the bit to short the stock, citing lousy fundamentals. I said that it might be prudent to wait to see if the formation completes itself before initiating a short position. I don't know if he took my advice, but his analysis of the company seems to have born him out.

At the time I profiled the stock, the chart had completed the left shoulder and the head, and was in the process of forming the right shoulder. I said that if the stock was able to trade above the neckline level of $13.30, a long trade to the $17-18 range would be viable. Unfortunately, the stock never did rise and the pattern was invalidated. Last Friday the stock traded under its previous low formed by the low point of the head ($8.71) and is trading lower today. For me, this would have been the signal to go short.

So if you're reading this Carl, kudos to you for the correct call! I bring this up to show that not every chart pattern works out as planned. You can see why it pays to be patient and wait until a pattern has completed itself before jumping in.