Technical Analysis of the Financial Markets: Ch 5

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:

1. A prior uptrend
2. A left shoulder (A) followed by a corrective dip (B)
3. A rally into a high on light volume (C)
4. A decline (D) that moves below (A)
5. A third rally (E) that fails to reach (C)
6. A close below the neckline (F)
7. 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