Head And Shoulders Top/Bottom-Technical Signs
1. Prior Trend: significantly, the establishment of a prior tendency is required for this to be considered as a reversal design. Without the history of a previous up trend to reverse, a head and shoulders top cannot be confirmed.
2. Left Shoulder: during this uptrend shaping, the left shoulder forms a peak and defines the fresh reaction high in the existing trend. Once formed, the likely advance ensues and through it completes the left shoulder pattern (1).
3. Head: the left shoulder low points mark an advance that far exceeds the previous high and creates the head of the pattern. A further decline represents the right hand side of the neck line.
4. Right Shoulder: the third advance creates the right shoulder, this rally is lower than the head and is generally parallel to the left shoulder rally, and it is preferred to have a harmonious pattern but sometimes not the case. The fall of the share price (right shoulder) should breach the neckline.
5. Neckline: the neckline evolves by simply connecting the two reaction lows (1 and 2). The reaction low 1 completes the formation of the left shoulder and the beginning of the head. The reaction high 2 completes the formation of the head and the development of the right shoulder. Depending on the association of the two reaction lows the neckline can slope up, down or be equal in appearance. The slope of the neckline will affect the patterns degree of confidence in the stock. A downward slope indicates a more bearish sentiment in the market
6. Volume: with the head and shoulders top pattern unfolding, volume has an important role in the confirmation of the pattern. It is preferable that the volume during the left shoulder pattern is higher than the advance head section. The warning unfolds with the decreased volume. The following warning is when the volume increases on the rapid fall towards the neck; the conclusion is as volume increases even further as the price falls away at the right shoulder.
7. Neckline Break: The head and shoulders bottom pattern is not completed and the uptrend is not reversed until the neckline support is breached. There must be a convincing expansion of volume for this to be defined.
8. Support Turned Resistance: when the support is broken, it is quite common for these same levels of support to evolve into resistance. On occasion but not always the share price will fall to the support break and this gives traders a second opportunity to close positions.
9. Price target: once the neckline resistance is broken, to project the potential decline, you would calculate the following. You measure the distance from the neck line to the top of the head. You then subtract the measurement from the neckline to reach the new price target in the future. This must merely be used as a guide to the objective price as other factors can come into play.
Article Source: FxTradingStock.com
About the Author
TradingLounge.com.au and the TradingLevels Analysis Service have been developed by Peter Mathers to meet a growing demand for accessible, sensible education and his TradingLevels-based analysis. Delivering high quality analysis and trades recommendations for shares, CFDs, fx trading, indices, commodity. If you want to know more about trading analysis, click here.
by: Peter Mathers
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Date: Thu, 8 Jul 2010
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