INDIA - NIFTY Head & Shoulder Pattern Formation

Trading Call: NIFTY Sell CMP @ 6070 Stop Loss of 6250 closing basis Target of 5760 – 5640 - 5500.

As its name implies, the Head and Shoulders reversal pattern is made up of a left shoulder, a head, a right shoulder, and a neckline. Other parts playing a role in the pattern are volume, the breakout, price target and support turned resistance. We will look at each part individually, and then put them together with some examples.

1.        Prior Trend: It is important to establish the existence of a prior uptrend for this to be a reversal pattern. Without a prior uptrend to reverse, there cannot be a Head and Shoulders reversal pattern (or any reversal pattern for that matter).

2.        Left Shoulder: While in an uptrend, the left shoulder forms a peak that marks the high point of the current trend. After making this peak, a decline ensues to complete the formation of the shoulder (1). The low of the decline usually remains above the trend line, keeping the uptrend intact.

3.        Head: From the low of the left shoulder, an advance begins that exceeds the previous high and marks the top of the head. After peaking, the low of the subsequent decline marks the second point of the neckline (2). The low of the decline usually breaks the uptrend line, putting the uptrend in jeopardy.

4.        Right Shoulder: The advance from the low of the head forms the right shoulder. This peak is lower than the head (a lower high) and usually in line with the high of the left shoulder. While symmetry is preferred, sometimes the shoulders can be out of whack. The decline from the peak of the right shoulder should break the neckline.

5.        Neckline: The neckline forms by connecting low points 1 and 2. Low point 1 marks the end of the left shoulder and the beginning of the head. Low point 2 marks the end of the head and the beginning of the right shoulder. Depending on the relationship between the two low points, the neckline can slope up, slope down or be horizontal. The slope of the neckline will affect the pattern's degree of bearishness—a downward slope is more bearish than an upward slope. Sometimes more than one low point can be used to form the neckline.

6.        Neckline Break: The head and shoulders pattern is not complete and the uptrend is not reversed until neckline support is broken. Ideally, this should also occur in a convincing manner, with an expansion in volume.

7.        Price Target: After breaking neckline support, the projected price decline is found by measuring the distance from the neckline to the top of the head. This distance is then subtracted from the neckline to reach a price target. Any price target should serve as a rough guide, and other factors should be considered as well. These factors might include previous support levels, Fibonacci retracements, or long-term moving averages.

NIFTY is showing Head & Shoulder Pattern formation and Neck Line is coming at 5950, sustain trading below 5950 will confirm the Pattern Formation. Right shoulder has retraced by 61.8% retracement of the fall from 6235 to 5935 testing level of 6125 showing a reversal pattern and the expected target on lower side in this case will come to test 5640 which is 161.8% Fibonacci expansion level. Further on lower side if trading is seen below 5640 might move further to test 5550 level which was the base where the rally has initiated upside. This formation is only true till the time prices are sustaining below 6240 closing basis above which it becomes invalid pattern formation. 

Symmetrical Triangle Pattern Breakout in USDINR for target of 59.75

Trading Call: Buy at the level of 55.5 Stop Loss of 54.6 Target of 56.60 – 58.10 – 59.75 levels.

A symmetrical triangle pattern is relatively easy to identify. In addition, triangle patterns can be quite reliable to trade with very low failure rates. There is a caution concerning trading these patterns, however. As mentioned previously, a triangle pattern can be either continuation or reversal patterns. Typically, they are continuation patterns. To achieve the reliability for which the triangle is well known, technical analysts advise waiting for a clear breakout of one of the trendlines defining the triangle.

1. Occurrence of a Breakout - Technical analysts pay close attention to how long the triangle takes to develop to its apex. The general rule, as explained by Murphy, is that prices should break out - clearly penetrate one of the trendlines - somewhere between three-quarters and two-thirds of the horizontal width of the formation.6 The break out, in other words, should occur well before the pattern reaches the apex of the triangle. . Adherence to this rule is strongly advised by Yager, She adds that the closer the breakout occurs to the apex the higher the risk of a false breakout.

2. Price Action - Unlike ascending and descending triangles which give advance notice of their intentions, the symmetrical triangle tends to be a neutral pattern. Murphy advises that the symmetrical triangle is generally a consolidation pattern. This means an investor can look to see the direction of the previous trend and make the basic assumption that the trend will continue. However, many experts advise investors that because the breakout direction could go either way that they wait until the breakout occurs before investing in or selling the stock. Schabacker refers to a symmetrical triangle as a "picture of hesitation.

3. Measuring the Triangle - To project the minimum short-term price objective of a triangle, an investor must wait until the price has broken through the trendline. When the price breaks through the trendline, the investor then knows whether the pattern is a consolidation or a reversal formation. To calculate the minimum price objective, calculate the "height" of the formation at its widest part - the "base" of the triangle. The height is equal determined by projecting a vertical line from the first point of contact with the trendline on the left of the chart to the next point of contact with the opposite trendline. In other words, measure from the highest high point on one trendline to the lowest low point on the opposite trendline.

Both these points will be located on the far left of the formation. Next, locate the "apex" of the triangle (the point where the trendlines converge). Take the result of the measurement of the height of the triangle and add it to the price marked by the apex of the triangle if an upside breakout occurs and subtract it from the apex price if the triangle experiences a downside breakout.

For example, working with a symmetrical triangle, assume the highest high of the pattern occurs at 100 and the lowest low at 80. The height of the pattern is 20 (100 - 80 = 20). The apex of the triangle occurs at 90. The pattern has an upside breakout. Using the measuring rule, the target price is 110 (90 + 20 = 110).

4. Duration of the Triangle - As mentioned before, the triangle is a relatively short-term pattern. It may take up to one month to form and it usually forms in less than three months.

5. Forecasting Implications - Once breakout occurs, the symmetrical triangle tends to be a reliable pattern. Bulkowski calculates failure rates ranging between 2% and 6% for symmetrical triangles after a valid breakout.

To avoid mistaking a false move for a valid breakout, experts advise waiting a few days to see if the breakout is dependable. According to Murphy, minimum penetration criteria would be a closing price outside the trendline and not just an intraday penetration. Investors do have time once a breakout has occurred.18 According to Bulkowski, when considering symmetrical triangles, an investor will have over five months to reach the ultimate high after an upside breakout and less than half that time after a downside breakout

Because premature breakouts (where prices close outside of the trendline) are so common, don't dismiss the pattern if it has experienced such a breakout. According to Bulkowski, however, "premature breakouts do not predict the final breakout direction or success or failure of the formation."

USD/INR, working with a symmetrical triangle, the highest high of the pattern occurs at 56.5 and the lowest low at 51.85. The height of the pattern is 4.65 pips (56.5 – 51.85 = 4.65). The apex of the triangle occurs at 55.10. The pattern has an down side breakout. Using the measuring rule, the target price is 59.75 (55.10 + 4.65 = 59.75).

One Pager Report on AUDUSD Symmetrical Triangle Pattern Formation

Trading Call: Sell below the level of 0.9850 Stop Loss of 1.0200 Target of 0.9300 – 0.8750 – 0.8150 levels.

CMP is 0.9840

A symmetrical triangle pattern is relatively easy to identify. In addition, triangle patterns can be quite reliable to trade with very low failure rates. There is a caution concerning trading these patterns, however. As mentioned previously, a triangle pattern can be either continuation or reversal patterns. Typically, they are continuation patterns. To achieve the reliability for which the triangle is well known, technical analysts advise waiting for a clear breakout of one of the trendlines defining the triangle.

1.         Occurrence of a Breakout - Technical analysts pay close attention to how long the triangle takes to develop to its apex. The general rule, as explained by Murphy, is that prices should break out - clearly penetrate one of the trendlines - somewhere between three-quarters and two-thirds of the horizontal width of the formation.6 The break out, in other words, should occur well before the pattern reaches the apex of the triangle. . Adherence to this rule is strongly advised by Yager, She adds that the closer the breakout occurs to the apex the higher the risk of a false breakout.

2. Price Action - Unlike ascending and descending triangles which give advance notice of their intentions, the symmetrical triangle tends to be a neutral pattern. Murphy advises that the symmetrical triangle is generally a consolidation pattern. This means an investor can look to see the direction of the previous trend and make the basic assumption that the trend will continue. However, many experts advise investors that because the breakout direction could go either way that they wait until the breakout occurs before investing in or selling the stock. Schabacker refers to a symmetrical triangle as a "picture of hesitation.

3. Measuring the Triangle - To project the minimum short-term price objective of a triangle, an investor must wait until the price has broken through the trendline. When the price breaks through the trendline, the investor then knows whether the pattern is a consolidation or a reversal formation. To calculate the minimum price objective, calculate the "height" of the formation at its widest part - the "base" of the triangle. The height is equal determined by projecting a vertical line from the first point of contact with the trendline on the left of the chart to the next point of contact with the opposite trendline. In other words, measure from the highest high point on one trendline to the lowest low point on the opposite trendline.

Both these points will be located on the far left of the formation. Next, locate the "apex" of the triangle (the point where the trendlines converge). Take the result of the measurement of the height of the triangle and add it to the price marked by the apex of the triangle if an upside breakout occurs and subtract it from the apex price if the triangle experiences a downside breakout.

For example, working with a symmetrical triangle, assume the highest high of the pattern occurs at 100 and the lowest low at 80. The height of the pattern is 20 (100 - 80 = 20). The apex of the triangle occurs at 90. The pattern has an upside breakout. Using the measuring rule, the target price is 110 (90 + 20 = 110).

4. Duration of the Triangle - As mentioned before, the triangle is a relatively short-term pattern. It may take up to one month to form and it usually forms in less than three months.

5. Forecasting Implications - Once breakout occurs, the symmetrical triangle tends to be a reliable pattern. Bulkowski calculates failure rates ranging between 2% and 6% for symmetrical triangles after a valid breakout.

To avoid mistaking a false move for a valid breakout, experts advise waiting a few days to see if the breakout is dependable. According to Murphy, minimum penetration criteria would be a closing price outside the trendline and not just an intraday penetration. Investors do have time once a breakout has occurred.18 According to Bulkowski, when considering symmetrical triangles, an investor will have over five months to reach the ultimate high after an upside breakout and less than half that time after a downside breakout

Because premature breakouts (where prices close outside of the trendline) are so common, don't dismiss the pattern if it has experienced such a breakout. According to Bulkowski, however, "premature breakouts do not predict the final breakout direction or success or failure of the formation."

AUD/USD, working with a symmetrical triangle, the highest high of the pattern occurs at 1.1080 and the lowest low at 0.9380. The height of the pattern is 0.1700 pips (1.1080 – 0.9380 = 0.1700). The apex of the triangle occurs at 0.9850. The pattern has an down side breakout. Using the measuring rule, the target price is 0.8150 (0.9850 – 0.1700 = 0.8150).