Welcome to Bravechart. Your in-depth article on chart analysis from a Scotsman stationed in the Outback.
As traders, we use technical analysis as a reliable method for speculating on future price direction of both equities (shares) and indexes. Technical Analysis in simple terms is the study of historic price movements in a chart in search of patterns or consistently traded support and resistance levels. Today we are looking at a specific chart pattern that falls under “Reversal Patterns”, the Head and Shoulders.
Appearance: A Head and Shoulders comprises of:
- Bullish movement to a resistance level creating the first (Left) Shoulder.
- The subsequent fall to a support level, creating what is known as the ‘Neckline’.
- The bullish rise after hitting the Neckline with the share price breaking through the Left Shoulder resistance level and creating a higher resistance level – this is called the Head.
- The fall back to the Neckline, then a rise back to roughly the ‘Left Shoulders’ resistance level where it reverses once again (Right Shoulder).
- The final part of the Head and Shoulders to be complete, the break of the Neckline, and a reversal in the long-term trend.
Reversal Pattern: The Head and Shoulders can be a very reliable reversal pattern. You can see that after the share price has the risen to create two resistance levels, it eventually falls through the neckline and then confirms the reversal in trend, and the bearish move lower. Often, it can be the beginning of a downtrend and is often more reliable when it occurs after a keen rise. Often it is considered a longer-term reversal pattern rather than a short term one.
Important Note: The Head and Shoulders is not confirmed until the Neckline has been broken.
Example: S&P/ASX 200
XJO has been rising for a while now, and may have reached the top at the end of February. With the market looking like a perfect example of an Head and Shoulders, we are potentially starting to see break out of this and the reversal from bullish to bearish and a fall back to 6,000 may be seen. This move may not be seen for a while, but the XJO does look like we will start to fall or move sideways for the short-term, and may not break back above the ‘shoulders’. Remember this is only a speculative one, since we will indeed need to see 6,125 to confirm the breakout, don’t be too hasty to call this a confirmation.
There are many ways that you could take advantage of these patterns. As a specialist in derivatives, we are able to profit on a stock when it falls as well as when it rises.
If you would like to learn how to pick a stocks direction, then Join us at our live face to face one day “Technical Analysis, Picking the Direction of a Stock” course.
Contact us today on 03 8080 5788.
Regards,
Your Friendly Kilted Advisor,
Benjamin Farkas