Friday, December 2, 2011

Reversal Patterns Part 1a Inverse Head and Shoulders

Common Characteristics

1. (Left Shoulder) trading volume increases notably
followed by a minor recovery on which volume runs less
than it did during the days of the final decline and at the bottom.
2. (Head) Another decline carries prices below the bottom
of the left shoulder on which activity shows some increase
(as compared with the preceding recovery) but usually
does not equal the rate attained on the left decline, followed
by another recovery which carries above the Bottom level of the
left shoulder and on which activity may pick up, at any rate
exceed that on the recovery of the left shoulder.
3. (Right Shoulder) A third decline on decidedly less volume than accompanied the
making of either the left shoulder or head which fails to reach the level of the head before another rally starts.
4. An advance on which activity increases notably, which pushes up through the neckline and closes above by an amount approximately equivalent to 3% of the market price, with a conspicuous burst of activity attending this penetration. This is the confirmation or breakout.

(you must click image to enlarge )

The neckline is also the resistance line. If volume is strong through the resistance line it is considered a better break. These patterns appear usually after a notable downtrend and mark the bottom or a short term reversal in a prior trend.

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