REVERSAL PATTERNS (CONT.)
3. Head and Shoulders Pattern
-Bearish,reversal pattern signalling the end of the current uptrend.
-Basically looks like the silhouette of a human left shoulder,head and the right shoulder.
Like the Double Top,strong volume push prices upwards forming the "left shoulder".The pullback is on lesser volume,then another strong rally on good volume,forming the "head"......but this time,the volume causing this rally although forming higher prices,is now on relatively lower volume as compared to the vol. in the rally causing the left shoulder.....as the stock pulls back to the neckline,and starts rallying again to form the rt.shoulder,now volume is very noticeably lighter.
-The break of the neckline confirms the H & S pattern(Neckline is the line connecting the two troughs on either side of the head).Volume expansion is noticed as the pattern confirmation takes place.......and the stock or index is now in adown trend.(Reverse happens now......vol. expands on the down fall and decreases on a return move up).
Trading-Wise:ENTRY:The first down day below the neckline confirms the pattern.......short below the low of that bar.If it gives a return move,and not able to break the neckline(now that line has become resistance)....short half on that return move,and the other half below the low of the confirmatory bar.
TARGET:First target would be.......calculate the difference from the head to neckline.Add that to the low of the bar that confirmed the pattern.
STOP:The high of the right shoulder.
One Important Condition:Once the neckline gets broken,expect a return move......but at all costs the price should not re-break the neckline upwards.If this happens,it is called a FAILED H&S PATTERN.Like a failed breakdown,this acts as a bear trap.....and is bullish.So get out if that neckline gets broken back upwards...
4. INVERSE H&S PATTERN
-Reverse of the above.
-reversal pattern that ends a downtrend.
-Tradewise,all reverse of above.
Happy Trading!!
Saint
