The Failed Head and Shoulders Price Pattern
Once
prices have moved through the neckline and completed a
head and shoulders pattern,
prices
should not re-cross
the neckline again. At a
top, once the neckline has been broken on the downside,
any decisive close back above the neckline is a serious
warning that the initial breakdown was probably a bad
signal, and creates what is often called, for obvious
reasons,
a failed head and shoulders.
This type of
pattern starts out looking like a classic head and
shoulders reversal, but at some point in its development
(either prior to the breaking of the neckline or just
after it), prices resume their original trend.
There
are two important lessons here. The first is that
none of these chart patterns are infallible. They
work most of the time, but not always. The second
lesson is that technical traders must always be on
the alert for chart signs that their analysis is
incorrect. One of the keys to survival in the
financial markets is to keep trading losses small
and to exit a losing trade as quickly as possible.
One of the greatest advantages of chart analysis is
its ability to quickly alert the trader to the fact
that he or she is on the wrong side of the market.
The ability and willingness to quickly recognize
trading errors and to take defensive action
immediately are qualities not to be taken lightly in
the financial markets.
The Head And
Shoulders as a
Consolidation Pattern
Before
moving on to the next price pattern, there's one final
point to be made on the head and shoulders. We started
this discussion by listing it as the best known and most
reliable of the major reversal patterns. You should be
warned, however, that this formation can, on occasion,
act as a consolidation rather than a reversal pattern.
When this does happen, it's the exception rather than
the rule. We'll talk more about this in "Continuation
Patterns."
The Failed Head and Shoulders
Price Pattern