Arch Capital Group (ACGL) is forming a classic head and shoulders pattern, which as you can see in the video below. This is typically a bearish chart pattern, signaling that the stock may be getting ready to break down. Since the pattern implies lower prices, a put position is likely the highest probability trade here. After the second shoulder is formed, we typically watch for the price to break the “neckline.”

In addition to this chart pattern, we also have momentum divergence with negative momentum on RSI that corresponds to the higher price peak or the head of the price pattern, a sign that the stock is losing out on that pace to the upside. We can us this as a second confirmation, in addition to the bearish chart pattern.

As traders, when we are looking for the highest probability trade, one of the ways we determine whether or not a trade is high probability is to find more than one confirmation. Our trade in focus today is a great example of what I mean by that. Not only do we see a stock that is forming a bearish chart formation, but we see that there is a momentum divergence, as well.

Most of the time, a chart pattern is not enough to determine whether or not you should take a bullish or bearish stance on a stock because there is always a chance it will not play out like the last time you saw this pattern. However, if we confirm that pattern with two or more confirmations, then we increase our conviction in the trade and can feel more confident about how we position ourselves.

I urge you to watch the full video breakdown to learn more about his pattern, as well as the momentum divergence that helps us confirm what the pattern is implying. Learning to have more than one confirmation in your trading will save you the headache, and ultimately, a lot of money.

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