Learn to Spot a Head and Shoulders Pattern in Your Charts (Video)
A Trading Lesson from Elliott Wave International's Jeffrey Kennedy
Senior Analyst Jeffrey Kennedy is the editor of our Elliott Wave Junctures trader education service and one of our most popular instructors. Jeffrey's primary analytical method is the Elliott Wave Principle, but he also uses several other technical tools to supplement his analysis.
You can apply these methods across any market and any timeframe. Enjoy this lesson and then find out how you can get additional trading lessons from Elliott Wave International.
My primary tool as a technical analyst is, of course, the Wave Principle. Even so, I find great value in other forms of technical analysis, such as candlesticks and indicators. With this in mind, let's review one of my favorite old-school chart patterns -- Head-and-Shoulders.
Spotting a Head & Shoulders Pattern
This formation was popularized by Edwards and Magee in their seminal work Technical Analysis of Stock Trends. It is a reversal pattern and consists of a left shoulder, a head and a right shoulder.
A trendline drawn between the price extremes of the left shoulder and head and head and right shoulder is referred to as the neckline. The neckline is important for two reasons -- the first being that a parallel of the neckline drawn against the extreme of the left shoulder can identify the extent of the formation of the right shoulder.
The second important aspect of the neckline is that it can provide a high probability target for the subsequent breakout. If prices decisively penetrate the neckline, the distance between that point and the head is often a reliable objective for the ensuing price move. Watch this 4-minute video where I explain more:
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This article was syndicated by Elliott Wave International and was originally published under the headline Learn to Spot a Head & Shoulders Pattern in Your Charts (Video). EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.