Today I’am going to expand on the Head And Shoulder chart pattern. The Head And Shoulder pattern is one of the most popular chart patterns which means that sometimes the pattern fails. When it comes to technical analysis or any other kind of analysis for that mater in the financial markets, if everyone sees the same pattern and trades the pattern the same way the chart pattern usually fails. When everyone is on the same side of the market all of the money is in the same bet and the chart pattern usually fails. The trick is to be on the opposite side of the trade when everyone else is in the financial markets, DEEP, that’s the pivot point moment. Usually, the majority of the time, when the money is on the same side of the market and the market trend is coming to an end, you’ll notice a 5 wave wedge. If you look back on my previous blogs you’ll see an article on this chart pattern. The five wave wedge is my favourite because it’s the end of a wave and a change in trend is almost guaranteed, remember, the financial markets are based on probability not guarantees.
Now for the chart’s
click the chart to see...Russell 2000 Hourly Chart, June 8, 2012
When you look at my previous articles, you’ll read about what I’ve been saying about the Head And Shoulders patterns in the making and when the pivot points were to take place, important reversal chart patterns.
There is a classic book out there by Robert D. Edwards and John Magee called “Technical Analysis of Stock Trends”. If I remember right it was written in the 1930′s some time.
This is what they said about Head and Shoulders top formation.
The left shoulder is a strong rally, climaxing from an extensive advance with heavy trading volume, the left shoulder then goes down on lower trading volume than it did in the rise of the left shoulder.
The Head of the pattern has a strong rally with heavy volume and the price rises higher than the left shoulder and then there is a correction on less volume taking the price somewhere around the bottom level of the left shoulder.
The right shoulder of the pattern gives you less trading volume than the formation of the left shoulder and the head as the right shoulder forms. The right shoulder doesn’t go beyond the peak of the head as another decline comes to play.
Finally, the price goes down beyond the neckline with a pivot point of about 3% below the neckline, this is the confirmation or breakout/breakdown. The price then goes up to the extended neck line and then falls further on heavier volume. It is important to note that every item of the Head and Shoulder pattern is essential for the pattern to give you any forecasting value.
click on the chart to see...HUI Index June 8, 2012 head and shoulders pattern, hourly chart
The HUI Index above show a Head and Shoulders Bottom.
The left shoulder basically comes to an end from an extensive down trend with higher than average volume. The price then goes up with lower volume.
The head is made up of another decline which takes price below the left shoulder, the volume does increase compared to the previous rally but usually does not exceed the volume of the left shoulder decline. The rally coming out of the bottom of the head goes beyond the bottom of the left shoulder with volume that exceeds the rally of the left shoulder.
The right shoulder starts with a decline that has lower volume than the declines of the left shoulder and the head. The right shoulder doesn’t exceed the lows of the head.
Finally, the rally out of the bottom of the right shoulder goes beyond the neckline with a pivot point of about 3% above the neckline with above average volume as it goes through the neckline giving confirmation of a breakout. The price then bounces off of the extended neckline goes higher with above average volume.
Well, that’s about it for today. As I’ve mentioned in previous articles, the next pivot point is due around June 15/17 and then the middle of July. You’ll notice on the HUI hourly chart the final chart pattern is a wedge, and the candles have tails indicating a bearish pattern. The down trend shouldn’t last too long, give us a rally till the middle of June and then finally fall to the middle of July.
So there you go, that’s the way things are working out right now. I hope today’s article on the chart pattern Head and Shoulders help’s you out.
