Chart Patterns: Head & Shoulders

[JTH]

It seems everyone and their mother is watching the latest Head & Shoulders on the Daily chart. Here is what a basic Head & Shoulders pattern looks like, with the Left Shoulder, Head, & Right Shoulder.

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As a typical rule, both shoulders rise within 50% of the Head, and below you can see we've met this criteria.

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When drawing the price targets, I like to use some short regression lines to identify the median price within a small area like the Shoulders & Head. You can see the regression lines drawn in white, and the price targets drawn in red. According to Bulkowski (http://thepatternsite.com/hst.html) sloping necklines tend to perform better, and if the right shoulder is smaller than the left shoulder, price action to the downside is more severe.

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One of the things we're missing is a rise in volume at the break of the neckline. A significant rise in negative volume is one of the things we should be seeing here. Regardless, it should be interesting to see if this pattern plays out.

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[mayday]

U hav som sceery chorts thar JT. :(

[Bullitt]

I think the volume looks pretty good when put into context of summer trading. Maybe you can compare this H&S pattern the failed H&S pattern in July 2009, JTH.

[JTH]

I think the volume looks pretty good when put into context of summer trading. Maybe you can compare this H&S pattern the failed H&S pattern in July 2009, JTH.

Great point, and another thing I forgot to point out is that volume should be higher on the left shoulder, as in this failed Complex H&S from July 2009. Looking at Bulkowski's stats it's surprising to learn that a typical H&S only meets its price target 55% of the time.

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[JTH]

Hourly chart below:
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[JTH]

Bump, still watching the formation of a potential H&S, anyone else watching this and worried?

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[poolman]

Bump, still watching the formation of a potential H&S, anyone else watching this and worried?

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I'm watching it. I'm not worried. I'm staying in G.

:)

[sdouglas3]

Bump, still watching the formation of a potential H&S, anyone else watching this and worried?

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Doesn't the right shoulder usually have to trade higher than the left shoulder and not make a new high but a lower high?

Steve

[nnuut]

Head and Shoulders Top (Reversal)

A Head and Shoulders reversal pattern forms after an uptrend, and its completion marks a trend reversal. The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows of each peak can be connected to form support (http://stockcharts.com/school/doku.php?id=chart_school:glossary_s#support), or a neckline.


As its name implies, the Head and Shoulders reversal pattern is made up of a left shoulder, a head, a right shoulder, and a neckline. Other parts playing a role in the pattern are volume (http://stockcharts.com/school/doku.php?id=chart_school:glossary_v#volume), the breakout, price target and support turned resistance (http://stockcharts.com/school/doku.php?id=chart_school:glossary_s#support). We will look at each part individually, and then put them together with some examples.
Prior Trend: It is important to establish the existence of a prior uptrend for this to be a reversal pattern. Without a prior uptrend to reverse, there cannot be a Head and Shoulders reversal pattern (or any reversal pattern for that matter).
Left Shoulder: While in an uptrend, the left shoulder forms a peak that marks the high point of the current trend. After making this peak, a decline ensues to complete the formation of the shoulder (1). The low of the decline usually remains above the trend line, keeping the uptrend intact.
Head: From the low of the left shoulder, an advance begins that exceeds the previous high and marks the top of the head. After peaking, the low of the subsequent decline marks the second point of the neckline (2). The low of the decline usually breaks the uptrend line, putting the uptrend in jeopardy.
Right Shoulder: The advance from the low of the head forms the right shoulder. This peak is lower than the head (a lower high) and usually in line with the high of the left shoulder. While symmetry is preferred, sometimes the shoulders can be out of whack. The decline from the peak of the right shoulder should break the neckline.
Neckline: The neckline forms by connecting low points 1 and 2. Low point 1 marks the end of the left shoulder and the beginning of the head. Low point 2 marks the end of the head and the beginning of the right shoulder. Depending on the relationship between the two low points, the neckline can slope up, slope down or be horizontal. The slope of the neckline will affect the pattern's degree of bearishness: a downward slope is more bearish than an upward slope. Sometimes more than one low point can be used to form the neckline.
Volume: As the Head and Shoulders pattern unfolds, volume plays an important role in confirmation. Volume can be measured as an indicator (OBV (http://stockcharts.com/school/doku.php?id=chart_school:glossary_o#obv), Chaikin Money Flow (http://stockcharts.com/school/doku.php?id=chart_school:glossary_c#chaikinmoneyfl ow)) or simply by analyzing volume levels. Ideally, but not always, volume during the advance of the left shoulder should be higher than during the advance of the head. This decrease in volume and the new high of the head, together, serve as a warning sign. The next warning sign comes when volume increases on the decline from the peak of the head. Final confirmation comes when volume further increases during the decline of the right shoulder.
Neckline Break: The head and shoulders pattern is not complete and the uptrend is not reversed until neckline support is broken. Ideally, this should also occur in a convincing manner, with an expansion in volume.
Support Turned Resistance: Once support is broken, it is common for this same support level to turn into resistance. Sometimes, but certainly not always, the price will return to the support break, and offer a second chance to sell.
Price Target: After breaking neckline support, the projected price decline is found by measuring the distance from the neckline to the top of the head. This distance is then subtracted from the neckline to reach a price target. Any price target should serve as a rough guide, and other factors should be considered as well. These factors might include previous support levels, Fibonacci retracements, or long-term moving averages. [more] http://stockcharts.com/help/doku.php?id=chart_school:chart_analysis:chart_patt erns:head_and_shoulders_t

[JTH]

Doesn't the right shoulder usually have to trade higher than the left shoulder and not make a new high but a lower high?

Steve

Along with the previous post, either shoulder should be at least a 50% retracement from the head. From the chart I posted, the right shoulder retraced 50%.

[Bullitt]

I think that once this thing breaks down toward 900 on S&P, the H&S will appear very obvious. For now, it's a guessing game. I do think that the bear market has resumed.

[JTH]

Perhaps it's time to start considering an inverted Head & Shoulders?

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[Birchtree]

Now you have my attention. Several of these inverted H&S patterns have worked well in the past.

[JTH]

Two H&S drawn differently based on the left shoulder. Either ways the PO is 1011-1015

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[JTH]

Cramer explains the Head & Shoulders :D
http://www.cnbc.com/id/15840232?video=1573933708&play=1

[malyla]

Cramer explains the Head & Shoulders :D
http://www.cnbc.com/id/15840232?video=1573933708&play=1



Interesting. Cramer thinks chart technicians are self-fulfilling prophets. Chartists read a H&S pattern and act out of fear to sell, fulfilling the downside target of the pattern. Has a technically perfect pattern like we have today, ever failed? The low volumn on the right shoulder is very convincing for a true H&S reversal, but I'm I just being an alarmist?;) Cramer differently has the ability to make you doubt your trading strategy. Too bad for him, I'm a perma-bear right now and caution is my mantra. When that black swan swims by, all sectors, even the recession-'proof', will be hit.:toung:
(although, it may be a gray duck swimming innocently by that I ignore resulting in a 10% loss and an extra year of employment before I can retire:worried:)