HEAD AND SHOULDERS
do not appreciate that a move by the DJI above the apex of its right shoulder
is a reliable Buy,
especially in Summer, when a seasonal upswing from June lows is fairly common.
A lot of advisors tell
us to cover short sales then because the head and shoulders pattern thereafter
has been destroyed.
I would go further than that and say BUY in these cases, but watch the
indicators, Peerless signals and the uptrending NYSE A/D Line.
"Technical analysis is not always 100% accurate,
so it is important to always place a stop loss in case the pattern fails.
I would recommend placing a stop loss at a price just above the second
right shoulder. If at any point price moves and closes above the head,
then the pattern has failed.
In the three cases shown below, you can see that the accompanying NYSE A/D Line was always
weak as the
pattern unfolded, but then improved considerably first when the neckline either held
or only briefly
failed and then when the apex of the right shoulder was exceeded. The general
clearly taking its cue from the DJIA.
Early Signs The Pattern Will Fail
Good breadth and a rising A/D Line is a certainly a warning that
head and shoulders pattern
may not work out
as the chartists expected. In July 2009 the A/D Line did not confirm the
false breakdown. Our Short Selling book
also tells us to watch for positive Accumulatin Index
readings. Consistently positive AI readings on the right shoulder are bullish, So is a rising OBV Line
while the pattern
is forming. Look at the SP-500 chart just below for 2009. You can see these
factors were all at
work in the SP-500 chart working to destroy the pattern.
DJIA: 1951, 1983, 2009