Stocks & Commodities V. 31:6 (8–9): Letters To S&C by Technical Analysis, Inc.

Stocks & Commodities V. 31:6 (8–9): Letters To S&C by Technical Analysis, Inc.
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Letters To S&C by Technical Analysis, Inc.



In the May 2013 Letters To S&C, reader George Jones brings up some identification issues regarding Giorgos Siligardos’ April 2013 article (“Head & Shoulders, Algorithmically, Part 1”). The question that was considered was: Can we call a pattern a head & shoulders if the neckline slopes differently or the volume trends differently than is described in historical texts (such as the one mentioned in the letter, Technical Analysis Of Stock Trends by Robert Edwards & John Magee)?

Jones makes an interesting point that it is important to consider the work of others. Siligardos, in his reply, is also correct regarding neckline slope and volume trend as they relate to trading, but they can also be important to identification.

Knowing that today’s markets are different from those when Edwards & Magee lived, I researched the performance of the head & shoulders pattern and tested the neckline slope, volume trend, and other attributes, and published the results in my 2005 book, Encyclopedia Of Chart Patterns, Second Edition. I used the historical record to build a foundation, and then let the test results describe which variation worked best.

For the head & shoulders top, I found 814 patterns in bull and bear markets. Patterns with downsloping necklines resulted in the worst performance (horizontal and upsloping were better, respectively). Patterns with a rising volume trend also outperformed those with a falling trend. The same results occurred in both bull and bear markets.

A glance at the Edwards & Magee book shows numerous charts of head & shoulders tops with upsloping necklines, and they describe the volume pattern as being sometimes highest on the left shoulder, sometimes equal to the head, and sometimes the head has a higher volume.

My conclusion is this: If it looks like a duck and quacks like a duck — even if it has a weird neckline or leaves behind a volume of droppings — it’s still a duck.

Tom Bulkowski

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