EGLDHEAD-AND-SHOULDERS PATTERN — Although occasionally an Inverted
Head-and-Shoulders Pattern (called a Consolidation Head-and-Shoulders)
will form, which is a Continuation Pattern, in its normal form, this pattern
is one of the more common and more reliable of the Major Reversal Patterns.
It consists of the following four elements (a Head-and-Shoulders Top will
be described for illustration): (1) a rally which ends a more or less extensive
advance on heavy volume, and which is then followed by a Minor Reaction
on less volume; this is the left shoulder; (2) another high-volume advance
which exceeds the high of the left shoulder, followed by another low-volume
reaction which takes prices down to near the bottom of the preceding reaction, and below the top of the left shoulder high; this is the head; (3) a third
rally, but on decidedly less volume than accompanied either of the first two
advances, and which fails to exceed the high established on the head; this
is the right shoulder; and (4) a decline through a line drawn across the
proceeding two reaction lows (the neckline), and a close below that line
equivalent to 3% of the stock’s market price. This is the confirmation of the
breakout. A Head-and-Shoulders Bottom, or any other combination
Headand-Shoulders Pattern, contains the same four elements. The main
difference between a Top Formation and a Bottom Formation is in the volume
patterns. The breakout in a Top can be on low volume. The breakout in a
Bottom must show a “conspicuous burst of activity.” Minimum Measuring
Formula: add the distance between the head and neckline to the breakout
point.
LEVERAGE: X5
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