The purpose of this Market Call section is to
educate readers in technical analysis patterns and indicators. As with all investment
information, you need to research information and consult your financial advisor before
initiating any strategies that are contained in Market Call.
Also, you must realize that as with all trading strategies,
opinions can change quickly depending on market conditions and developments.
This column tries to present historical examples, potential set
ups, and examples of entry and exit strategies.
Also, you must realize that as with all trading strategies, opinions can
change quickly depending on market conditions and developments.
This column tries to present historical examples, potential set ups, and
examples of entry and exit strategies.
The Head and Shoulders Pattern
The head and shoulders pattern is generally regarded as a reversal pattern
and it is most often seen in uptrends. It is also most reliable when found
in an uptrend as well. Eventually, the market begins to slow down and the
forces of supply and demand are generally considered in balance. Sellers
come in at the highs (left shoulder) and the downside is probed (beginning
neckline.) Buyers soon return to the market and ultimately push through to
new highs (head.) However, the new highs are quickly turned back and the
downside is tested again (continuing neckline.) Tentative buying re-emerges
and the market rallies once more, but fails to take out the previous high.
(This last top is considered the right shoulder.) Buying dries up and the
market tests the downside yet again. Your trendline for this pattern should
be drawn from the beginning neckline to the continuing neckline. (Volume
has a greater importance in the head and shoulders pattern in comparison to
other patterns. Volume generally follows the price higher on the left
shoulder. However, the head is formed on diminished volume indicating the
buyers aren't as aggressive as they once were. And on the last rallying
attempt-the left shoulder-volume is even lighter than on the head,
signaling that the buyers may have exhausted themselves.) New selling comes
in and previous buyers get out. The pattern is complete when the market
breaks the neckline. (Volume should increase on the breakout.)
This pattern can be used on charts of various time frames from minutes to
daily or even weekly charts.
Our charts are 60 minute charts.
Let's look at CMGI, Inc., (NASDAQ: CMGI)
Head and Shoulders Pattern:
A major reversal pattern with four distinct features:
Left Shoulder:
A high volume rally and top followed by a minor reaction with
significantly less volume than during the rise and top. This is the period
June 29 through July 2.
Head:
Another high volume rally with the top reaching a higher level than the
left shoulder, followed by a another reaction on less volume that takes the
price to a level near the bottom of the previous reaction. This time frame
is July 2 through July 9.
Right Shoulder:
A third rally on noticeably less volume that fails to reach the top of the
head. This is the July 13 through July 16 time frame.
Neckline:
A decline in prices from the top of the right shoulder which falls below
the line formed when connecting the bottoms of the left shoulder. This is
drawn by connecting the bottom around 108 of the left should on June 29 and
the current low of July 12 at 108.
I would exit CMGI on any break of 108.
An aggressive trader may want to Short CMGI on this break at 108.
On a Short position, I would place my stop at 114.
