A New Slant On Head And Shoulders by Charles E. Miller
Here’s a detrending technique that will help you visualize
slanted head and shoulder top patterns more clearly.
When the good old reliable head and
shoulders (H&S) pattern emerges
simultaneously in the Dow Jones
Industrial Average (DJIA), the Nasdaq
Composite (COMPX), and the S&P
500, it is not a good sign. The H&S
indicates that a top has been reached, and that the
market is due to head down. The display of the DJIA
chart in Figure 1 is a near-perfect example of a classic
head and shoulder pattern. H&S bottom formations are
just as significant, but are subject to slightly different
THE HEAD AND SHOULDERS PATTERN
The H&S formation ideally consists of a series of three
failed upward moves resulting from the dynamics of
interactions between buyers and sellers. After an upward
price trend, those who have ridden their stocks up will
sell and take profits. This ends the uptrend forming the
left shoulder. When the sellers are done selling and the
buyers are satiated, volume contracts and prices fall.
At some point during this pullback, a group that had
missed the original uptrend starts buying on what they
perceive to be a technical reaction. The aggregate
volume during the period defined by the head is
usually lower than that of the left shoulder, and all
those who bought or held at the top are faced with
losses as the prices decline to the right of the head.
Then a final and typically even smaller group of
hopefuls starts buying again.