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Reversal Patterns
Head & Shouders
A healthy uptrend moves up in steps. Most rallies higher peaks than the preceding rally and declines stop at a
higher level than the preious decline. When an uptrend fails to reach a higher high or a decline falls below the previouse low, it shows
that bulls are losing their grip. Head & shoulders marks the end of uptrends. The "head" is a price peak surrounded by two lower peaks,
or "shoulders". A neckline connects the lows of declines from the left shoulders and the head. The neckline does not have to be
horizontal - it may be flat, rising, or falling. A downsloping neckline is especially bearish - it shows that bears are becoming stronger.
When price fail to rally above the head, they confirm that a Head & Shoulders is developing. The right shoulder
may be higher or lower than the left and may be shorter or longer. The decline from the right shoulder breaks the neckline. When that
happens, the uptrend is dead. After breaking the neckline, price somtimes pull back to it on low volume. This feeble rally offers an
excellent opportunity, with a logical stop just above the neckline.
Head & Shoulders often have typical volume patterns. Volume is often lower on the head than on the left shoulder.
It is even lower on the right shoulders. Volume tends to increase when prices break the neckline. When prices pull back to it, volume is
very thin. A Head & Shoulders pattern provides an approximate target for the new downtrend. You can obtain it by measuring the distance
from the top of head to the neckline and projecting this down from the neckline.
Inverted Head & Shoulders
This is a mirror image of a normal Head & Shoulders - the head at the lowest point, surrounded by two shoulders. This pattern develops
when a downtrend loses its force and gets ready to reverse.
In a valid downtrend, each new low falls lower than the previous low, and cach rally stops at a lower level. A
strong rally from the head allows you to draw a neckline. When a decline from the neckline fals to reach the level of the head, it
creates the right shoulder. When prices rally from the right shoulder above the neckline on increased volume, they complete the Invertd
Head & Shoulders and a new uptrend is begins. Sometimes a Head & Shoulders is followed ny a pullback on the neckline on low volume,
offering an excellent buying opportunity. Measure the distance from the bottom of the head to the neckline and project it upward from
the point where the neckline was broken. This gives you a minimum measurement for rally, which is frequently exceeded.
Double Tops and Bottoms
Doubble Tops occure when prices rally to the area of the previous hight. Double Bottoms occur when prices fall
near the previous low. The second top or bottom can be slightly above or below the first. This often confuses beginning analysts.
Most of the traders use technical indicators to identify double tops and bottoms. They are often marked by
bullish and bearish divergences. Buying at double bottom and selling short at double tops offer some of the best trading opportunities.
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