Head & Shoulder Chart

You should now have a basic understanding of Trend Lines and their workings from our first chapter. In this chapter we will discuss some of the patterns that form on the charts that help give a further indication of an impending Trend Reversal.

Once again some of the patterns about to be discussed are very powerful and SHOULD be respected!



Head & Shoulder Pattern
Inverse Head & Shoulder Pattern
Double Tops
Double Bottoms
Rounded Top . Saucers
Rounded Bottoms / Saucers and Cups
Triangles
Flags / Pennants / Wedges


Head & Shoulder Pattern















The Head & Shoulder Pattern has claim to being one of the most reliable of all chart patterns. It is usually formed at the end of an upward trend or market rally and acts as a SELL signal.

There are four main components that make up a H&S pattern and they are :


The Left Shoulder
The Head
The Right Shoulder
The Neckline
















The Left Shoulder - The market looks to test higher price levels. Increasing Volumes. Followed by retracement to neckline.
















The Head - Market again looks to test higher ground and succeeds with setting a higher price that was set by the Left Shoulder. Large Volumes Followed by retracement to neckline.




















The Right Shoulder - Once again the market looks to test higher ground but this time fails to achieve the high price set by Head. Reducing Volumes. Again followed by retracement to neckline only this time there is a good chance of the Neckline being violated and the market MAY look to test Lower ground.




















The Neckline - Is a line that is drawn connecting consecutive lows. It is a line where the price bounces off and refuses to go below. It is basically the same as a support line.

Most traders who are familiar with this pattern would try to liquidate at the top of the Head or as it started to retrace towards the Neckline

If you are still holding a stock during the Right Shoulder stage it may be your last chance to liquidate before the price tests lower ground.
I advise that you look to liquidate at the top of the Right Shoulder, remember you can always buy it back at a lower price.