Head & Shoulders PatternBearish Head and Shoulders pattern
Type: Bearish Reversal
Prior Trend: Bullish
Look: Like human body head & shoulders
Right shoulder: Right shoulder is formed when prices correct after a sustained up trend
Head: once the correction is over prices resume their uptrend and make a new high that is prices start a rally to new highs than the prior high which was cloaked after a sustained up trend.
Left shoulder: Prices reverse and retreat almost to the point from where they started their rally and resume their uptrend however this time prices this time not only fail to make a new high and also unable to reach the prior high. In most cases, the rally is limited to the height of the left shoulder around it gives and takes 2 to 3 percent.
Neckline: A-line joining the low point of the left shoulder to the low point of the right shoulder.
Pattern confirmation point: Break of neckline
Pattern Target: Height of the head calculated from neckline deducted from the breakdown point of neckline
Confirmation needed: Must
Pattern failure point: when prices come back 50% of the Right shoulder length to the neckline point that is 50% retracement of the neckline point to the right shoulder
Example: CBOT Corn is currently forming a bearish head and shoulders pattern with a neckline placed at USc720. The left shoulder height is from 723 to 823 while the head length is from 723 to 824 so around 100 points is the head length from the left shoulder and the right shoulder height is from 723 to 798. The neckline breakdown point is 723 and deducting 100 from 723 gives around 623 targets on the downside. The conservative target is 50% which comes to around 673.
Traders Tip: Try to correlate with three different moving averages to improve pattern efficacy.
