Page 158 - THE MARKET WHISPERER

156 PART 5 - Principles O f Technical Analysis

breakdown formation is of no importance to us. The breakdown succeeded,
and with correct money management, as we will learn later, we can profit
nicely from that, too.

SMART The success of a pattern in leading to breakdown or
MONEY breakout is measured in the distance the price moved
after the breakout. There is no guarantee that the pattern’s
success in the short range will lead to a continuation of the
trend.

Head and Shoulders

The head and shoulders formation is considered one of the strongest
bearish formations. As with the inverted cup and handle, here, too, the
structure involves candles consolidating above the line of support in
expectation of its breakdown.

The head and shoulders formation, being so powerful, is a favorite of
traders and therefore draws the attention of sellers and short sellers more
than other formations.

The formation is comprised of a left shoulder indicating the first low
price, a head indicating the upward correction and a return to the low, and
a right shoulder indicating an additional correction followed by the return
of the stock to a low at the support point. The low’s breakdown is where
support breaks, and also where the short enters.

The tractor manufacturer AGCO drops immediately when the trading
session opens, corrects a little upwards, and forms the left shoulder [1],
corrects and forms the head [2], returns to the support line, corrects again
and forms the right shoulder [3], and finally breaks the line of support.