Head And Shoulder Pattern (HASP)/ Inverse Head And Shoulder Patterns (IHASP)
Head and also Inverse Head and Shoulder patterns are powerful reversal patterns. They normally form near the end of stock market trend, whether major long term or short term minor trend. This is an ideal set up to short the market.
The above chart show FTSE100 index formed a minor top- left shoulder, then followed by slightly higher high to form a head with increased volume. It then retraced to just below the high of the head to form a right shoulder with decreasing volume.
To enter short position, you draw a horizontal support line across the low of the shoulders - neck line. You place an order to enter the short position when it breaks below the low of the neck line.
To Work out target price
- Subtract the highest price on the Head from the lowest price of the neck line.
- Subtract the result from 1 to the neck line to get the target price.
If you are a bit conservative like me,subtract the distance from right shoulder to the neck line as sometimes that's all the distance it travels.
Please note , when it's going down, this pattern often finishes its move quicker than the time it takes to form the pattern as this example shows.
It often bounces or retraces the breakout move. When it does not go above the neck line, there is another chance to go short again as in this example. This was just over 38.2% fibonacci retracement from the right shoulder.
Remember if it retraces less than 50%, it's likely to continue in the same direction. Price target - roughly same distance from the right shoulder, which surprise, surprise is just shy of 100%
Inverse HAS Pattern
FTSE100 formed this reversal pattern a few weeks later, implying another trend reversal.
This pattern is the same as pattern as described above but upside down.
Note, it can have slanted neck line rather than flat horizontal lines.You need volume to rise during the formation of shoulder just before it breaks to the upside.
Price target calculations and analysis are the same as above.
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