THE HEAD AND SHOULDERS FAILURE PATTERN

THE HEAD AND SHOULDERS FAILURE PATTERN

So far, we have discussed patterns that have been completed. The stocks have broken through the Necklines, and we know which way they are probably going. But sometimes a Head and Shoulders formation, or one of its variations, will develop in a perfectly normal fashion but will fail to penetrate the neckline. (See Figure 22.) Instead, the stock moves "sideways,” fluctuating indecisively. We know, then, that a reversal pattern has not developed. But we also know that the price activity within this area may be preparing a significant trend move in either direction.

This activity is much like that of a car stuck in snow or mud. By a judicious shifting of gears, the motorist causes the vehicle to rock back and forth. When the momentum is just right, he steps on the gas and away he goes, forward or in reverse—at least, so he hopes. In a Head and Shoulders

Failure Pattern, the up-and-down movement within a sideways range establishes momentum, and at just the right moment—penetration of the top or bottom line of the trading range—prices gain traction, and a new trend is established. This type of formation can support a major move.