Monday, October 29, 2007

The Head And Shoulders Reversal Pattern

One of my favorite technical formations that I love to trade is the Head And Shoulders reversal pattern. In my opinion I've found this pattern to be effective at identifying tops and bottoms. Is it 100% accurate? No way! Is it 90% accurate? not even close.. but I will say that it has made me money more times than not. So what I would like to do is share with you some of the head and shoulders trades that have worked for me in real-time trading.

Anybody can post charts after the fact and say look how good this method worked or if you would have done this you could have made blah blah blah ...etc... What I would like to do is show all of you some examples of trades I have recommended on this blog along with a few links for you to click on which will show what I saw BEFORE the move happened.

The reason I decided to make this post about the head and shoulders pattern is because I was going over my trades for the year and I noticed that some of my biggest winners were captured because of this pattern...So lets go straight to the charts and take a look.



Above is a chart of the Reits. Back in April I became bearish on this group for a few reasons. One of the reasons was because of the head and shoulders formation. Here is the original chart of the Reits the way it looked to me back in April..If you look above you can see the massive sell off that followed.




Above is a chart of the Dow Jones Industrials. Just last month I became bullish on the stock market because of the head and shoulders bottom formation that developed along with relative strength I was seeing in the other world markets..
I think it was fed Day when the Dow exploded through the neckline and rallied. The head and shoulders bottom in the stock market was no secret, I remember reading about it on many different websites before the move even took place.




Above is a chart of the XBD (broker index). Last summer I became bearish on the brokerage stocks because of a head and shoulders top that was forming. Here is a link which will show what I saw before the move happened. If you look at the above chart, you will see the huge sell off that followed. Even though I saw the sell off coming, I missed catching the short trade because I was involved and focused on my other existing positions. Let me tell you, missing this short trade was very upsetting!




Above is a weekly chart of the Homebuilders (HGX).. Last year during the month of May, the HGX index confirmed the head and shoulders top by penetrating the neckline and a large sell off followed going into the summer. I remember trading this group from the short side due to this pattern. I also remember covering my shorts in September because of a head and shoulders bottom that formed on the daily . If you look closely at the above chart, you might be able to see the H&S bottom that formed during the months of June through August of 2006.

I could post more examples of the head and shoulders formation but I think all of you get the idea... This pattern has been around for many years and I'm sure you can find lots of free information on the Internet for this pattern.

A friend of mine got suckered into buying an E-book years ago online which stated that there is a "secret method" which identifies tops and bottoms with amazing accuracy. He bought the e-book eager to find out what this "secret method" was. It turned out the method was the head and shoulders pattern..So don't be fooled into buying anything from anyone on this particular pattern. There is enough free information on the web which will show examples and explain how to arrive at targets for this pattern...If you have any questions I'll be more than happy to answer them. Good luck.

19 comments:

Closet Daytrader said...

Nice! Thanks for taking the time to share your review with us!

Stephanie said...

Thanks, Kevin. Any insight in how you are able to pick trades like you do is welcomed information. Do you use some kind of software screen to find these patterns or do you just look through an insane amounts of charts each day for potential setups?

Kevin said...

Hi guys...

I don't use any kind of software to find my trades.. I just look at many charts and when I see a pattern developing, I'll write it down or save it to a file so I know to watch it.

hkc_00 said...

Kevin,
Thanks for the great analysis. Do you see any H&S with the current Dow and SP500?

JBetz said...

Kevin
Great post highlighting your actionable calls in the past. I find your blog to be one of the best out there due to your simple, yet applicable observations.

In regards to the H&S pattern, the Semi Index (SOX) broke through a nice H&S top last week. However, the advance leading up to it wasn't anything special. An individual semi stock with H&S top in the works is IFX - almost textbook volume characteristics throughout the pattern.

JB

Kevin said...

Hi HKX,

I don't see any H&S in the dow or S&P at the moment on the daily charts...but if you look at intraday charts, you might be able to find H&S formations which work well for day trading.

Andrei said...

How about the h&s top in the USD index that you just posted. Pretty long term.. maybe im seeing things?

Kevin said...

Hi Andrei,

I don't see the H&S top in the dollar...The H&S formation is a reversal pattern which means there has to be something to reverse. In order to have a H&S top, the market would have to be in an uptrend and then the reversal pattern takes place.. Obviously the dollar is in a downtrend so there can't possible be a H&S top. I hope this helps.

Lawrence Chiu said...

Kevin, can you comment on the potential h&s pattern for IFX that jbetz spoke of?

http://lcmarket.blogspot.com/2007/10/potential-head-and-sholders-pattern-in.html

Lawrence Chiu said...
This comment has been removed by the author.
Lawrence Chiu said...

Oops URL got cut off.

http://lcmarket.blogspot.com/2007/10/potential-head-and-sholders-pattern-in.html

Andrei said...

Kevins,
I see that a H&S pattern requires a previous trend...but I believe that it can also happen in the middle of a trend (although not as reliable). The pattern i see is the left shoulder from 97-99, head 99-05, and right shoulder 05-07. Then connect the downward sloping trendline, which it is very close to. What do you think?

Kevin said...

Hi Andrei and lawrence,

In my opinion I just don't see a H&S pattern in the dollar or IFX.. One thing I learned over the years is not to try and force a pattern if it's not really there.. I just dont see it...maybe after a few drinks I might..:-)

JBetz said...

Below is a link to an annotated chart of IFX showing the H&S. Not all patterns are "picture perfect." The volume characteristics are very supportive of a trend reversal and the industry (SOX index) already broke its neckline.

IFX Chart

clarence said...

Kevin: Is there a inverse head & sholder pattern in oil. Look at Janruary for the head sholder late October & mid March.

Kevin said...

Hi Clarence,

Yes there was an inverese Head and shoulders in oil and I wrote about it earlier this year...I was actually long based on that formation..

Trek said...

for hgx and xbd what stocks do you trade as equivalents?

Trek said...

for hgx and xbd what stocks do you trade as equivalents?

Anonymous said...

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