[TheNegotiator]

So how useful is the head and shoulders pattern today? I think most people would say that it's pretty useful. But why? How many of us stop to question the nature of this old chart pattern? Let's take a look at the nature of it and discuss the reasons for it's efficacy.

[TheNegotiator]

So a head and shoulders pattern, or inverse of the same pattern, is simply put a trend followed by a pullback, then a further push and another pullback and finally a last attempt to continue the trend which lacks in strength. So basically the last push higher(or lower) makes a lower high(or higher low) than the second swing and indicates exhaustion in the trend. A 'trend' or 'neckline' is drawn between the pullback lows(or highs) to indicate a potential entry once the pattern completes.

[TheNegotiator]

So what are the implications of the supply and demand in this pattern? Well, the trend starts and continues with the left shoulder, pullback and then head. The buyers in the above image of gold try to push the price higher but either are met with stronger selling (new or old business) or lack of continued strength. This is clearly demonstrated by the lack of a continuing trend which would have been indicated by a higher high. The last piece is the neckline break. The pullback trend is broken indicating a capitulation of longs. Generally I would look for this pattern on a 30 min timeframe or more as I see it as having momentum implications.

[Tams]

Originally Posted by TheNegotiator »

So a head and shoulders pattern, or inverse of the same pattern, is simply put a trend followed by a pullback, then a further push and another pullback and finally a last attempt to continue the trend which lacks in strength. So basically the last push higher(or lower) makes a lower high(or higher low) than the second swing and indicates exhaustion in the trend. A 'trend' or 'neckline' is drawn between the pullback lows(or highs) to indicate a potential entry once the pattern completes.

if you add volume to the chart,
you might see an even better picture.
if you don't have volume,
stochastics is a good supplement.

[TheNegotiator]

Volume of course can 'complete' the story somewhat. For example, what would be your view on a break of the neckline if you then saw that there was no follow through selling appearing in the volume? Would you still be wanting to sell hard into the break or would it be more prudent to wait for an attempted retest and fail of the neckline? Coupling it with delta is another way to go. Stochastics is another possibility I guess but you should already be seeing price divergence on the right shoulder, no? Would you use stochastics in another way Tams?

[Tams]

Originally Posted by TheNegotiator »

Volume of course can 'complete' the story somewhat. For example, what would be your view on a break of the neckline if you then saw that there was no follow through selling appearing in the volume? Would you still be wanting to sell hard into the break or would it be more prudent to wait for an attempted retest and fail of the neckline? Coupling it with delta is another way to go. Stochastics is another possibility I guess but you should already be seeing price divergence on the right shoulder, no? Would you use stochastics in another way Tams?

you will see the volume behavior at trend reversal



more details here...
http://www.traderslaboratory.com/for...ship-6320.html

[zdo]

J.M. Hurst has one of the best 'explanations' of the pattern I have ever seen / used.

re: "So how useful is the head and shoulders pattern today?"
And in that context, it's as useful as it ever was.
ie It 'succeeds' as much as it ever did... and it 'fails' as much as it ever did...

[TheNegotiator]

A nice example of a potential H&S pattern today in the ES and how jumping the gun is not advisable!