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.
