Hi there,
Can someone enlighten me on what implies when a head and shoulder forms on a downtrend (not the inverse head and shoulder, the actual head and shoulder).
was looking at the Eur / GBP daily chart and i see one forming but the pair is in a downtrend. am confused as to what it implies, a reversal or continuation or what?
please help.
thank you
There’s major support @ 7000 which seems to be holding. A break below could see a continuation of the downtrend. For me the H&S didn’t mean much here seen that the major support didn’t break.
Head & Shoulder patterns come after long bull moves, what you are(were) dealing with is not a H&SH. Even though there are some rare occasions when you have a H&SH after a long bear move which in this case is a continuation pattern. But in the EURGBP case that was not a H&SH since the neckline is out of proportion (Neckline must be rising or flat, in this case it was a falling neckline)
What you were dealing with was a potential rising (bull) channel.
Necklines for H&SH are measured from the 2 bottoms found between shoulder(Left & Right) and head
From the chart below you can see the assumed neck line (which it is not) is falling, this is only applicable in Inverted H&SH which come after long bear moves.
The neck line of the head and shoulder pattern is at 0.7000 which is acting as the major support level for the currency pair. A breakout below this level would trigger the further sell off in the market with the next target level of 0.6516
Hello Rohit
Of course price patterns are a subjective tool and people see different things,
please do note than the neck line is drawn connecting the bottoms of the head (bottom 1: between head and left shoulder + bottom 2: between head and right shoulder. ) what you connected are the outer bottoms of the shoulders not the inner bottoms of the head.
Check figure 5-1 from Murphy s book
John Murphy’s “Charting Made Easy” [ChartSchool]
What you draw is indeed a support level but not a neckline!!
yes i agree to Oceanmen. It is very much important that the bottoms of the shoulder should touch the neckline. so the given chart is not showing any H&S Pattern. On the other hand this H&S pattern usually indicates bearish trend with target price will the the gap between neck line and head. whereas inverse H&S indicates bullish trend.
But never consider that this kind of formation will go as predicted. there is a probability that it act as a false indicator. i mean, an chart forming inverse H&S could let the prices fall in the negative territory, may be due to some negative news. And as a technical and news trader, i keep both the things in mind while trading.
In general, if you do encounter a H&Sh after a long bear move, then it is not a reverse pattern but a continuation pattern. These are rare but do exist (H&Sh continuation during a bear trend OR Inverted H&Sh during a bull trend are continuation patterns)
