Thursday, August 5, 2010

Failed Patterns

Devv asks:
"I have a question for you ..now that the s&p 500 has crossed over the 1016 mark, the right shoulder of the h&s pattern, does this confirm the failure of the h&s pattern, more so since it has also broken above its 200 and 127 dma's...i would like to know if this is a confirmed failure of the h&s pattern what is the usual expected move after such a failure?? It would be great if you could kindly answer this question of mine....."

My Notes: Here is the chart for the S&P500 with some comments. Detailed observations follow.


The breakdown of the large bearish head and shoulder pattern was acompanied by a few days below the neckline and then a sudden thrust above the line. After a big rally, the SP500 dipped then resumed its advance, making a pattern of higher highs, higher lows. This was around 1100. The sharp upside momentum, the up trend, as well as spending just a few days below the neckline suggested that the neckline was break is not valid. At least for now, the pattern should be abandoned.

Now, the classical method of identifying a failed head and shoulder pattern is a close above the high of the right shoulder. But, to me, momentum is more important. Here, the decline showed no momentum at all, while the subsequent rally did. Once prices went back inside the neckline and made an uptrend, the pattern should not be considered. The easiest rules are the best. A confirmed higher highs - higher lows pattern tells us we are in an uptrend.

There is a school of thought that says a failed pattern become a reversal pattern, pointing to big moves opposite the failure. In simple words, if the bearish pattern fails, expect a big up move. I do not care for such rules. The up move should be taken because of your trend methods, not due to some failure or other pattern.

1 comment:

Nifty Swingtrade said...

Sir,
My observation in Nifty future I saw it has made a negative divergence in Money Flow Index and also in MACD.
Is it comes a selling opportunity and when we confirm it? Please elaborate this.