Tencent Head & Shoulders Signals Drop: Technical Analysis

Tencent's QQ Stuffed Toy
A woman holds a Tencent Holdings Ltd. QQ stuffed toy, promoting the company's free messaging applications, for a photograph ahead of the company's news conference in Hong Kong. Photographer: Brent Lewin/Bloomberg

Tencent Holdings Ltd., Asia’s biggest Internet company that just capped its steepest monthly loss in 2 1/2 years, is poised to retreat 20 percent after completing a bearish head-and-shoulders trading pattern.

Tencent has lost 13 percent from a intraday record of HK$646 on March 7, which formed the head in the pattern. Shares fell below the level known as the neckline on March 27, when Tencent sank 5.9 percent on the highest trading volume in a year. The Shenzhen, China-based company is set to drop to HK$450 in the next six weeks, said Ayush Nagaraj, a sales trader at Sanford C. Bernstein & Co. It closed at HK$563.50 yesterday.

“Huge volumes on the neckline break is critical to the pattern, and downward sloping patterns are more bearish,” said Nagaraj. The pattern is “very reliable and often found at the ends of extended uptrends like the one Tencent has had.”

After rallying 99 percent in 2013, Tencent shares jumped 28 percent this year through a record close on March 6, making it the best performer on Hong Kong’s benchmark Hang Seng Index. It reversed course to become the third-worst in the period since. Tencent’s 13 percent loss in March was its biggest monthly decline since November 2011.

Asian technology companies surged in the past 12 months on speculation growing demand for social networking, e-commerce and online games will boost earnings and fuel takeovers in the industry. Concern increased that the rally had gone too far after King Digital Entertainment Plc, the maker of the “Candy Crush” smartphone game, tumbled 16 percent in its New York trading debut last week despite pricing its shares at a discount to rivals.

A head-and-shoulders pattern comprises three consecutive peaks on a chart, with the middle being the highest. The start of a downturn is signaled when prices fall below a line serving as the pattern’s base.

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.

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