Charting  |  DEC 2001

A New Slant On Head And Shoulders by Charles E. Miller

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 volume criteria. 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.

by Charles E. Miller