Head and Shoulders Charting Pattern

The market continues to slog painfully out of the recession. Traders are looking for head and shoulders patterns to spot market reversals as we see China further tightening credit, Hyundai gaining market share from Toyota, video games loosing luster, and congress taking aim at market makers in its attempts to find some cash to help pay the deficit. Whether trading catchups or day trading the politics of the recovery savvy traders are always on the lookout for market reversals. The head and shoulders pattern is said to approach 95% accuracy in spotting market reversals, according to some experts.

The head and shoulders pattern is a charting pattern that resembles a shoulder, a head, and a shoulder with three successive peaks of stock price. The first peak is moderate, the second is higher, and the third is lower again. The other key features are the “necklines” which are the valleys between peaks. Traders typically treat the neckline as a support level and the peaks as resistance levels. When the head and shoulders pattern emerges traders will commonly set stop loss orders at the right shoulder level, using the distance between neckline and shoulder as a profit target. A key to using the this pattern to spot market reversals is when the stock proceeds down below the previous neck level, breaking down out of the support level. This pattern is useful in trading the rallies and retreats of the stock market.

Use of the head and shoulders pattern or its mirror image may be useful in a number of current market situations as Hyundai picks up market share from brake problem plagued Toyota. Trading Toyota may be just as much about trading Hyundai, Honda, and Ford as counting the recalls of the world’s first place car maker. Another place to look for market reversals is in the mildly ailing video game industry. The likes of Carl Icahn are buying stock and seats on the board of video game companies with an apparent eye towards profits to be gained in buyouts and consolidations. The entire video game set of stocks as well as the auto makers may be good places to develop a strategy, do a little simulation trading, and see how the use of the head and shoulders pattern can generate trading profits.

The technical analysis of stocks using patterns that predict market reversal may also be useful looking at oil and other commodities as China tightens credit again, giving up short term growth to protect long term potential. Where in the world the action will be seems to fit with China on an ongoing basis as a major engine for global growth. When China raises credit requirements it may well be time to look for head and shoulders patterns in raw material suppliers to China’s industrial engine. Beginning traders unfamiliar with stock charting patterns are well advised to learn the basics of a pattern and practice in simulation trading using historical data stored in their trade station. When the trader has the ability to read the pattern and generate profits in the simulation world, and only then, should he or she venture into the world of video game company consolidation, the car wars, and commodity fluctuations caused by China’s credit concerns.

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