Replies to post #128061 on Zeev's Turnips Patch-No Politics (ZEEV)

[basserdan]

HnS on today's Comp chart (so far) meaningless here? Guess we'll know shortly..
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jrintl,

Excuse the intrusion, but fwiw, Steven Saville recently said "In our experience, head-and-shoulders patterns 'work' less than 50% of the time. In fact, given the number of people watching for such patterns nowadays there is no way that they could possibly work 50% or more of the time."

If he's right, that HnS you refer to is only an estimated 52%
meaningless mindicator. Flipping a quarter would give you slightly better odds. <bg>

Head and Shoulders

One of the favourite patterns amongst chart watchers is the "head-and-shoulders" chart formation. This pattern consists of three peaks - two lower peaks separated by a higher peak - with the theory being that once price moves below the neckline (a line drawn immediately below the three peaks) it will continue to move lower until such time that its distance below the neckline is the same as its distance was above the neckline at the 'head'. Below is an illustration of a head-and-shoulders pattern (note that they often aren't as symmetrical as the one drawn below and the neckline does not have to be horizontal).

While a head-and-shoulders pattern is considered to be bearish, a reverse (or inverted) head-and-shoulders pattern consisting of three lows is considered to be bullish.

In other words, someone who does nothing else other than trade head-and-shoulders patterns (selling after breaks below necklines of head-and-shoulders patterns or buying following breaks above necklines of inverted head-and-shoulders patterns) will probably lose money.

Where we have found head-and-shoulders patterns (and several other chart patterns) to be useful is in providing confirmation of views reached using other methods. For example, the below chart of the S&P500 Index shows the huge head-and-shoulders pattern that formed between 1997 and 2002. It turned out that someone who sold the S&P500 following the break below the neckline last year was selling within a few weeks of the bottom and after the bulk of the decline had already occurred. In other words, even if the S&P500 Index eventually moves well below last year's low, selling after the neckline break clearly wasn't a great move for anyone other than a short-term trader. What last year's neckline break did do, however, was provide after-the-fact confirmation that a major downward trend was underway.

(charts available upon request) <gg>