“INDICATOR OF THE DAY” - HEAD & SHOULDERS TOP
One of the classic pattern formations is the “Head & Shoulders” pattern which ultimately signals that a top is in place and the market is on the verge of a decent sized pullback. By definition, “a Head and Shoulders reversal pattern forms after an uptrend, and its completion marks a trend reversal. The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows of each peak can be connected to form support, or a neckline.” The objective or price target for the move once the pattern is triggered on the break of the neckline, should be equal to the distance from the neckline to the top of the head.
In the above example, we can see the potential formation of a “Head & Shoulders” top in Eur/Usd, with the neckline of the formation coming in by 1.3800. Therefore, we would be looking for a break below 1.3800 to trigger the pattern and open the door for a fresh downside extension back towards a measured move objective by 1.3260.
Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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