02/07/13 – Head & Shoulders Formation

MARKET MESSAGES

2/07/13

A reader wrote a comment recently about the recent head and shoulder formation.  He noted that I had used the term head and shoulders incorrectly.  He was right, I should have called this a continuation head and shoulders formation.  If I had been a bit more precise, there should have been no discussion.

The following are the H&S email comments I received.

“Submitted on 2013/01/23 at 6:29 AM

Re head/shoulders pattern. A “head and shoulders” is a REVERSAL pattern. A classic h and s occurs after a rally; a reverse h and s occurs after a decline. I see this (to me) misnomer all the time.”

“Submitted on 2013/01/29 at 4:23 PM

I’m sorry. I may not have made myself clear. A plain “h and s” is a reversal pattern coming after an advance. A “reverse h and s ” is also a reversal pattern coming after a decline. You cannot have a classic “reverse h and s” after an advance. The psychology behind the pattern is not the same and so the predictive value is questionable. This isn’t to say the SP won’t go to 1600 anyway.”

The point he was rightfully making is that you can’t have an inverse (or reverse) head and shoulders without a decline taking place FIRST.  The recent decline in question was almost the entire H&S formation and that doesn’t qualify as a genuine H&S formation.  That’s all true.  But this H&S is not your classical H&S formation.  It’s a CONTINUATION head & shoulders formation and not a reversal formation.

01-22-13 SPX DAILY BARS

01-22-13 HEAD & SHOULDERS IN UPPER RIGHT

Quoting from Edwards and McGee’s revised book “Technical Analysis of Stock Trends, 9th Ed” about consolidation head and shoulders:

Head-and-Shoulders Consolidations

All our references to the Head-and-Shoulders Formations up to this point (see Chapters 6 and 7) have considered that pattern as typifying a Reversal of Trend, and, in its normal and common manifestation, that is most definitely the Head-and-Shoulders function. But, occasionally, prices will go through a series of fluctuations which construct a sort of inverted Head-and- Shoulders picture, which in turn leads to continuation of the previous trend.

There is no danger of confusing such Continuation or Consolidation Formations with regular Head-and-Shoulders Reversals because, as we have said, they are inverted or abnormal with respect to the direction of the price . . .

In other words, one of these patterns that develops in a rising market will take the form of a Head-and-Shoulders Bottom. Those that appear in decline assume the appearance of a Head-and- Shoulders Top.

. . . the same formula applied to Consolidation Patterns of the Head-and-Shoulders form does not work out as well. Such patterns are usually quite “flat,” and the ensuing move generally extends well beyond the measurement implied thereby, while, in some cases, it may not go quite as far. Consequently, the Head-and-Shoulders formula cannot be applied to Consolidation Areas with assurance that it sets up a definite and dependable objective;

So Edwards & McGee are saying that the measurement objective of 1600 may, or may not be achieved.  These measurements are simply guidelines for future market action and they are never engraved in stone.

The following is a PDF of a few pages from the Edwards & McGee “Bible” of technical analysis about continuation H&S formations.

Edwards McGee H&S Comments

It’s a good book and I bought my first copy when I was 16.  Every technician should have a copy.

Technical Analysis of Stock Trends – available at Amazon

Here are a couple of charts that can’t be found in My Charts.  The last indicator is the ratio comparison line to the SP500.  Naturally comparing SPX to itself would yield a flat line.  Anything of interest in these two charts that I haven’t shown you before???

02-07-13 SP500 DAILY

02-07-13 SP500 DAILY

02-07-13 GLOBAL 100 DAILY

02-07-13 GLOBAL 100 DAILY

  • Click on any picture or chart to enlarge it

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3 Comments on “02/07/13 – Head & Shoulders Formation”

  1. focus12345 Says:

    Look forward to reading it.

    Like

  2. Bob Says:

    Hi Michael,

    That inspired me to write a lengthy update to my blog.

    Thanks,
    Bob

    Like

  3. focus12345 Says:

    Hi Bob,

    Hope all is well. What are your thoughts on this article?

    http://www.marketoracle.co.uk/Article38931.html

    Michael

    Like


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