This is a review of the fifth chapter of John J. Murphy’s Technical Analysis of the Financial Markets.
The Head & Shoulders Reversal Pattern
The basic ingredients are:
- A prior uptrend
- A left shoulder (A) followed by a corrective dip (B)
- A rally into a high on light volume (C)
- A decline (D) that moves below (A)
- A third rally (E) that fails to reach (C)
- A close below the neckline (F)
- A return move back to the neckline (G) followed by new lows.
Once prices move through a neckline and completed the h&s pattern, they should not re-cross the neckline again. A decisive penetration of the neckline might indicate a false alarm.
The inverse head & shoulders is pretty much the inverse of the image above.
Next up: Triple Tops & Bottoms