subject: Two-fold Bottom - Head and Shoulders Top and Bottom [print this page] Two-fold Bottom - Head and Shoulders Top and Bottom
Head and shoulders top
My observation of a head and shoulders top is confirmed when you assess the following:
A head and shoulders top pattern is an advance to a new high followed by weakness to intermediate support, a second rally to a higher high, a failure to hold it and a decline to the support level. This rally is retested to an unassuming third rally followed by a sharp fall through the support levels.
Why does this occur?
Head and shoulder patterns are reversal patterns that are amongst the most key in terms of reliability and recurrent. The head and shoulders pattern consists of three rallies and then a breakdown to a new low. The pattern is quite often quoted as the middle rally is described as the head (the highest point of the rally). The first and third rally is generally of equal height representing the shoulders.
This pattern generally evolves from an extended rally to new highs. The timeserving traders are apparently confident based on the market information being rather confirming. You could have a re-rating of a buy from research houses to confirm the market sentiment. This could push the stock price higher, but only days after these profit takers decide to sell it off and take profits. This causes a pullback or an answer low. Traders look to accept the profit taking and show no concern for the weakness, unfortunately problem waits.
On the first slump those traders who had been more assertive buying at a lower price begin to sell off their positions in to the positive thought. They have reached their profit targets and are keen to move on. The stock price falls and hits a reaction low. stretched term holders of the stock hold the charge at the reply low and after a few days the stock regroups on added positive news and the share rate reaches a fresh second high, much higher than the first new high. Even with the positive sentiment and positive market conditions the stock cannot hold this level as the volume of buyers has dried up. This creates the head or the second high. The sell off begins rapidly as earlier buys try to protect their gains. The institutions also decide to protect their profits and possibly there are traders pushing the stock lower. The stock declines back to the reaction low, further positive speculation hits the market and forces up the price, some traders cannot resist a bargain.
Regrettably, the final third rally of the design is less convincing than the previous two earlier advances. The stock rate does mover higher therefore the volume is weak and stock distribution is apparent. Following a number of sessions the declines return and the stock moves back to the reply lows. This is often called the neck line (within keeping of the image of the head and shoulders pattern). Unfurled the sellers ignore the market thought and the sell off is familiar and solid. The heavy volume causes the stock to collapse and over the coming weeks the share trades at its long term support levels.
