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Spotting a Head & Shoulders Pattern

10/29/2013 7:00 am EST


Jeffrey Kennedy

Editor, Commodity Junctures and Trader's Classroom

Senior analyst Jeffrey Kennedy of Elliott Wave Junctures demonstrates how you can spot trading opportunities using Elliott wave analysis and other technical analysis methods.

My primary tool as a technical analyst is, of course, the Wave Principle. In the first of this six-series lessons, I discussed how to know when to pull the trigger. Even so, I find great value in other forms of technical analysis, such as candlesticks and indicators. With this in mind, let's review one of my favorite old-school chart patterns—head-and-shoulders.

This formation was popularized by Edwards and Magee in their seminal work Technical Analysis of Stock Trends. It is a reversal pattern and consists of a left shoulder, a head, and a right shoulder.

A trendline drawn between the price extremes of the left shoulder and head and head and right shoulder is referred to as the neckline. The neckline is important for two reasons—the first being that a parallel of the neckline drawn against the extreme of the left shoulder can identify the extent of the formation of the right shoulder.

The second important aspect of the neckline is that it can provide a high-probability target for the subsequent breakout. If prices decisively penetrate the neckline, the distance between that point and the head is often a reliable objective for the ensuing price move. Watch this four-minute video where I explain more:

Although it does take quite a bit of time and practice before a trader can recognize chart patterns, they do provide a glimpse into future price movement, so it’s important to master this skill.

By Jeffrey Kennedy, Editor, Elliott Wave Junctures

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