Welcome to Bravechart. Your in-depth article on chart analysis from a Scotsman stationed in the Outback.
As traders, we use technincal analysis as a reliable method for speculating on future price direction of both equities (shares) and indexes. Technical Anyalysis in simple terms is the study of historic price movements in a chart in search of patterns or consistantly 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: BlueScope Steel Limited (BSL)
BSL has been on a downtrend since August last year, with the stock recently rallying slightly before forming the head and shoulders pattern. With the neckline being broken at the start of May, we have seen the stock go sideways since, but now falling once more. The share price has found a little bit of support at the $13.12 level, but if this breaks, we will likely see a fall to $11.70 afterwards. With the market sitting in a weird place right now surrounded by a trade war and US tariffs, it will be interesting to see how BSL reacts in the coming days.
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 “Technical Analysis, Picking the Direction of a Stock” course.
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