P? It can clearly be seenhere, even when not pointed out by Richard Russell. It is marked on the chart witha complex head. If one took the complex head alone the formation might be said tohave fulfilled itself with the bear market of 2001-2002. The long term trendline whichwas broken in 2000 should have been signal enough that the drunken binge wasover. Not to mention numerous Basing Points and/or lower lows. The bull market(or bear market rally of 2004) presents an interpretation problem. The question is hasthis prolonged rally nullified the massive Head-and-Shoulders? Such an extendedpenetration of the neckline might imply that we were reading too much into thepattern. And, in 2005, this rally is nose to nose with the huge top resistance made in1999-2000. the technician is forced to conclude that it will take years to overcome thisresistance. But remember, as technicians we are obliged to change our analysis asold highs are taken out, and new situations develop.
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chapter seven
Important ReversalPatterns — ContinuedHead-and-Shoulders (EN: or Kilroy) BottomsA formation of the Head-and-Shoulders type may develop at an importantReversal of Trend from down to up. In that case, it is, of course, called aHead-and-Shoulders Bottom, and its price pattern (as compared with a Top)is turned upside down, i.e., it stands on its head. EN: The present Editor hasalways been disturbed by the undescriptive nature of the term “Head-and-ShouldersBottom.” And so he has renamed it the “Kilroy Bottom.” See Figure 23.1. Thevolume pattern is somewhat the same (not turned upside down) as at a Top,but with some important changes in the latter half of the formation, whichwe shall discuss in detail. We can lay down specifications for it in much thesame words as we used for the Head-and-Shoulders Top. Here they are, withthe portions that differ in principle from the Top printed in italics.A. A decline, climaxing a more or less extensive downtrend, on whichtrading volume increases notably, followed by a Minor Recovery onwhich volume runs less than it did during the days of final declineand at the Bottom. This is the “left shoulder.” EN9: Or left hand.B. Another decline that carries prices below the Bottom of the left shoulder, on which activity shows some increase (as compared with thepreceding recovery) but usually does not equal the rate attained on theleft shoulder decline, followed by another recovery which carries abovethe Bottom level of the left shoulder and on which activity may pickup, at any rate exceed that on the recovery from the left shoulder. This isthe “head.” EN9: Or nose.C. A third decline on decidedly less volume than accompanied themaking of either the left shoulder or head, which fails to reach thelow level of the head before another rally starts. This is the “rightshoulder.” EN9: Or right hand.D. Finally, an advance on which activity increases notably, which pushesup through the neckline (EN9: Or fenceline) and closes above by anamount approximately equivalent to 3% of the stock’s market price,with a conspicuous burst of activity attending this penetration. This is the“confirmation” or “breakout.”75
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18
LOCKHEED
AIRCRAFT
LK
171615141943–194413Sales100’s125100755025
S
SH
S
H
S
OCTOBERNOVEMBER DECEMBER JANUARYFEBRUARYMARCH2 9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29 5 12 19 26 4 11 18 25
FIGURE 21. After “rounding over” in October 1943 in the last phase of a longdecline from 41 in 1940, Lockheed made a conspicuous 2-month Head-and-ShouldersBottom. Note especially, on the above chart, the volume on the rally in early Decemberand in the first week of January with reference to points B and D on the precedingpages. “LK” dropped back to 15 again in June 1944, then ran up quickly to 23 byNovember and finally reached 45 in January 1946. One advantage of logarithmicallyscaled charts is that they expand, and thus call attention to important formationswhich develop at low price levels, and which would be obscured on an arithmeticscale.
The essential difference between Top and Bottom patterns, you can see,lies in their volume charts. Activity in Head-and-Shoulders Bottom Formation begins usually to show uptrend characteristics at the start of the headand always to a detectable degree on the rally from the head. It is even moremarked on the rally from the right shoulder. It must be present on the penetration of the neckline, else the breakout is not to be relied upon as a decisiveconfirmation.There is an important basic principle of technics involved here whichmerits further discussion. Wall Street has an old saying that expresses it: “Ittakes buying to put stocks up, but they can fall of their own weight.” Thus,we trust, and regard as conclusive, any price break (by a decisive margin)down through the neckline of a Head-and-Shoulders Top even though itoccurs on a light turnover, but we do not trust a breakout from a Head-andShoulders Bottom unless it is definitely attended by high volume. A lowvolume breakout from a Bottom Pattern may only be premature, to befollowed after more “work” around the Bottom levels by a genuine advance,or it may be a “false” move entirely. It pays generally to wait and see. Thissame distinction in volume development applies to some of the other Reversal Patterns we shall take up farther on.
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Chapter seven:
Important Reversal Patterns — Continued
77
191817DOME MINES
DM
1941–1943
161514NL13121110S
S9Sales100’s
H
125100755025S
O
N
D
J
F
M
A
M
J
J
A
S
O
N
D
J
F
M
FIGURE 22. Weekly charts are particularly useful for detecting Major Bottom Reversals, since Bottom Formations characteristically take longer to build than Tops. DomeMines made a typical Head-and-Shoulders base, 13 months long, at its Primary TrendReversal in 1942. Note volume pattern. (Volume detail, however, is better studied ondaily charts.) Dome’s powerful Head-and-Shoulders Bottom was “high” enough to beconspicuous on an arithmetic monthly chart. Reached 25 in 1944.
Other differences between Top and Bottom Head-and-Shoulders do notinvolve any new principles. It can be said that Bottoms are generally longerand flatter, i.e., they take more time in relation to depth of pattern in pointsthan do Tops. This is particularly true when they occur at Reversals in thePrimary Trend. The overall volume at Bottoms tends to be less than at Tops,and the turns more “rounded.” In the construction of a Head-and-ShouldersTop the activity that goes into the left shoulder usually exceeds that on anypreceding rally in the entire uptrend. In a downtrend, on the other hand,there may be Panic Selling in some of the earlier phases of decline, whichruns the volume chart up to a mark higher than any that is subsequentlyregistered in the final Bottom Formation. But none of these differences affectsour essential Head-and-Shoulders specifications.
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201918
FEDERAL NATIONAL MORTGAGE ASSN.
17
FNM
1984
NL
161514131211Sales100’s
SSH
4000320024001600800MAYJUNEJULYAUGUST SEPTEMBER OCTOBER NOVEMBER5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24X D .04X D .04
FIGURE 23. With a strong movement toward lower interest rates evident sinceJune, the timing of the low in “FNM” is not surprising. Neither is the massive width(from March through October) of its evolving pattern, which closely matches that ofthe huge, complex Inverse Head-and-Shoulders Bottom in Treasury Bills (December1984), September 25, 1984. Even the slight timing lag is appropriate.
The measuring implications of the Head-and-Shoulders Bottom are thesame in all respects and are applied in the same way as with Tops. Tendencyto symmetry is again the rule, with variations as to slope of neckline, relativesize of shoulders about the same as in Tops. Reactions to the neckline following the initial breakout from the Bottom type appear in about the samefrequency and proportions as do the Pullback Rallies which follow initialbreakdown from the Top type.
Multiple Head-and-Shoulders PatternsThe Head-and-Shoulders Formations we have examined up to this pointhave been, despite minor variations, relatively simple and clean-cut, consisting of three well-defined elements. We come now to a group of relatedpatterns which carry much the same technical significance but have moreelements and are much less clearly defined. These are the Multiple Headand-Shoulders Tops and Bottoms, also known as Complex Formations. Weneed not take much of our space to define them or lay down specificationsfor them, since they may be described quite sufficiently as Head-and-Shoulders Reversals in which either the shoulders or the head, or both, have beendoubled or proliferated into several distinct waves.
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79
FIGURE 23.1. EN: At the risk of being considered a comic (actually, a satirist), I suggestthat, though the image is comical, the pattern is more descriptive of the incongruously named“Head-and-Shoulders Bottom” than the present terminology. Left hand equals left shoulder.Right hand equals right shoulder and nose equals head and neckline equals fence line, or, aseasily, neckline. I am teaching all of my students to think and use this term, which makesmuch more sense than the absurd “upside down Head-and-Shoulders Bottom standing onits head.” One hundred years from now this contribution to the nomenclature will be acceptedas totally descriptive and appropriate and the term “Head-and Shoulders Bottom” will havedisappeared from the lexicon.
Almost any combination is possible, of which only a few can be illustrated in the actual chart examples reproduced with this chapter. Formationsof this type appear with fair frequency at Primary Bottoms and Tops, butmore often at Bottoms than at Tops. They appear less frequently at Intermediate Reversals.A common form consists of two left shoulders of approximately equalsize, a single head, and then two right shoulders, again of approximatelyeven size and balancing the two on the left. Another is made up of two headswith two or more shoulders on either side. Still another, of which you willusually find several good examples at any Major Market Turn, consists ofdouble shoulders on either side of a head which is itself composed of a smallbut quite distinguishable Head-and-Shoulders development.
Tendency to SymmetryWe have mentioned the tendency toward symmetry in the simple Head-andShoulders Formation. Patterns of the Multiple or Complex type show aneven stronger urge toward symmetry — so strong, in fact, that it may becounted on in determining trading policy. If there are two shoulders on theleft, there are almost always two on the right of nearly the same size andduration. (Of course, one does not know that a Multiple is in process offormation until its right shoulder becomes evident.) Except in volume, theright-hand half of the pattern is, in the great majority of cases, an approximate mirror image of the left.Necklines on Multiple Head-and-Shoulders Formations are not alwayseasy to draw, since the reactions between the shoulders and between shoulders
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$INDU - Daily US L = 10125 .40 –114 .52 –1 .12% O = 10239.84
C = 10125.4010300.0010125.409847.009414.00
Faceline–Neckline
9082.64
9000.008604.008226.007864.00Hand
7518.00
HandNose
02 F M A
M
J
J
A
S O N D 03 F M A MCreated with TradeStation
J
J
A
S
FIGURE 23.2. A ragged Kilroy (or if from the old school a Head-and-Shoulders)Bottom which ended the bear market (or first phase thereof) of 2001-2002. Some 7½months in formation it threw a few knuckle balls and curves and looked right up toMarch 2003 as though it were a bear market rally. Once the neckline was taken outthere was no arguing with it. It was a real bottom. It balked at the neckline for acouple of months before becoming the full bull. Complex economic and politicalrealities affected the markets. The terrorist attacks of September 11, 2001, which putpaid to the tulipomania of the roaring nineties and the ill-advised tax cuts of theBush (II) administration. Using the Reagan formula of cut taxes and increase spending and start a war the market was sufficiently stimulated to rally exuberantly.Although the trend line is not drawn here the reader should have no trouble seeingthat the break of the long-term down trend as well as the Kilroy Bottom demandinga shifting of gears from bear to bull.
and heads may not stop at levels that all fall on a single line. Up-slopingand down-sloping variants seldom appear in this class of patterns; necklinesare almost always very close to the horizontal. Sometimes, it is possible toestimate by simple inspection where the critical line really lies. More often,there are two necklines, an inner and an outer, and no price movement ofconsequence is to be expected until the outer has been penetrated (which,of course, is simply another expression of that tendency toward symmetryreferred to above).Curiously enough, the “power” of a Multiple Head-and-Shoulders Pattern is more apt to be over- than underestimated. One might think, in viewof the length of time and amount of trading entering into its construction,that it would signal a move (in reverse direction to the trend preceding it)of greater extent than the simple Head-and-Shoulders. Yet, in its immediate
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68
Important Reversal Patterns — Continued
M C A INCORPORTED
MCA
81
1986
6460H
5652
S
H
S
S
S
48NL
44
Sales100’s200016001200800400JULYJUNEAUGUSTFEBRUARY MARCHAPRILMAY8 15 22 1 8 15 22 29 5 12 19 26 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30
FIGURE 24. “MCA” enjoyed an excellent advance from 1980–1986. But the goingbecame increasingly difficult after the turn of the year, when this issue began tochallenge its 1985 high. Although the Bulls did manage to set a new high water markin April, a series of Pullbacks kept this issue well away from any further tests. Indeed,a large Complex Head-and-Shoulders Top appeared to be unfolding with the MajorNeckline penetrated slightly on the sell-off.
consequences, at least, the Complex shows consistently less power. Minimum measuring rules for the two types of formations are the same and areapplied in the same manner. The difference between the patterns appears inthe price action after the minimum has been reached. The first downswingout of a plain Head-and-Shoulders Top, not counting any early PullbackRally, will frequently carry out the minimum measuring implications of thatpattern quickly and run well beyond it. From a Multiple Top, the firstdownswing is often more leisurely, and very seldom does it exceed the bareminimum — a probability well worth remembering when you are dealingwith an Intermediate rather than a Primary Top. Of course, if the Complexdoes develop at a turn in the Primary Trend, prices will eventually go muchfarther, but even then there is usually a strong recovery (or reaction, in thecase of a Bottom) from the “minimum rule” level.
A Leisurely PatternThe volume attending the construction of Multiple Head-and-Shouldersconforms in general to the “laws” we have previously stated and explainedfor simple Head-and-Shoulders Reversals. During the earlier stages of Multiple
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S
26
H
H1945–1946
S
24
NL
222019Sales100’s
BUDD
MANUFACTURING
BF
SH
125100755025
H
1
S
DECEMBERJANUARY FEBRUARY8 15 22 29 5 12 19 26 2 9 16 23 2
MARCHAPRILMAY9 16 23 30 6 13 20 27 4 11 18 25
FIGURE 25. An “ideal” Multiple Top made by Budd in 1946, with two heads.Observe accompanying volume. Prices often break away from Complex Formationsmore reluctantly than from the simple Head-and-Shoulders type. The late Marchrally, which went back through the old neckline, was greater than normal in thatrespect, but the general market Averages were pushing to new highs at this time.Re-penetration of a neckline does not, of itself alone, cancel the implications of aReversal Formation.
Formation development, the volume chart may show much irregularity withlittle recognizable pattern, but in the latter stages, its correspondence withthe Head-and-Shoulders Trend should be plainly seen.There is something about Multiple Head-and-Shoulders patterns especially pleasing to technical chart followers. Because of their symmetricaltendencies, it is fascinating to watch them evolve to completion. Once completed, however, they may try your patience by their seeming reluctance to“get going” with a new trend. On that account, it becomes easy at times tojump to the conclusion that they have “blown out,” i.e., produced a falsesignal. Actually, except in the matter of extent of move which we havealready discussed, they are fully as reliable as the plain Head-and-Shoulders.False moves are relatively rare with both. And in those extraordinary caseswhen a Complex Formation does go wrong, it still stands, like the plainHead-and-Shoulders, as a warning that the final Reversal is near.
Rounding Tops and BottomsThe Multiple Formations we have just examined are produced by a sort ofextension or proliferation of the ordinary Head-and-Shoulders pattern. Carrythis process still further and the Complexes merge into our next class ofReversals, known as Rounding Turns.
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Chapter seven:
Important Reversal Patterns — Continued
83
4038
SIL
3634
G
RLG
3230AMERICAN LOCOMOTIVE
LA
1946
2826Sales100’s125100755025
APRILMAY6 13 20 27 4 11 18 25 1
JULYJUNEAUGUSTSEPTEMBER8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28
FIGURE 26. The long Multiple Head-and-Shoulders Top made by American Locomotive in 1946 displays very well the sort of volume pattern — irregular, but takingon definitely Bearish character in its latter half — that is normal to this formation.The rounded Bear Market Rally of August (compare price and volume trends) wasunable to attain the old neckline, but was stopped at a Resistance (RL) created byearlier Bottom levels (see Chapter 13). G and G mark Breakaway Gaps which werenot “covered” (see Chapter 12).
In our first approach to the theory of chart Reversal Patterns, we sawwhy it takes time and a considerable volume of trading to swing an established trend in prices from up to down or down to up. In the Head-andShoulders type of Reversal, the trend surges, struggles, attacks again andagain before it finally gives up and retreats. During this struggle, the balancebetween the forces of supply and demand fluctuates, often wildly, untilfinally the one overcomes the other. In the Multiple Formations, a similarprocess goes on but rather less violently and, over a period of time, theprogressive change from one force to the other becomes clearly apparent.The Rounding Turn is a much more simple and logical manifestation ofthis technical phenomenon. It pictures simply and plainly a gradual, progressive, and fairly symmetrical change in the trend direction, produced bya gradual shift in the balance of power between buying and selling.If, for example, the buying has been stronger than the selling for sometime past, we know that the result will have been a general upward trendin the price of our stock, as indicated by our pictorial chart record of itstrading history. So long as the buyers of the stock remain more anxious, morenumerous, more aggressive, more powerful than the sellers, that precedingupward trend will continue. Now, however, suppose the selling grows a
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136128
DIGITAL EQUIPMENT CORPORATION
DEC
1985
120112
NL
10496S
S
S
8880
SH
Sales100’s4000320024001600800JUNEJULYAUGUSTSEPTEMBERMAYAPRILMARCH9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28 5
FIGURE 27. From a Head-and-Shoulders Top in February, Digital plunged sharplylower into mid-June, retracting roughly two thirds of the 1983–85 advance. Thesummer low was the head of a Broad, Complex Head-and-Shoulders (EN: Or Kilroy)Bottom. “DEC”, however, had already enjoyed a high-volume penetration of theneckline and was, therefore, in a buying position.
little stronger, while the buying either weakens slightly or remains stationaryat its previous strength. This slight change in the technical balance will beindicated by a slowing up of the previous advance. As the selling increasesin relative power, it will finally become equal to the buying power, with theresult that the market level moves neither up nor down but remains for atime quite stationary (except for Minor and insignificant fluctuations).Assume that the new development continues and the selling pressuregrows until it is finally stronger than buying power. Now the balance ismoving the other way. There are now more sellers than buyers, and the resultwill be a gradual decline in the market quotations for the stock. If this changein the balance of power is fairly steady and continues to its logical conclusion,we can see, even without the aid of a chart, that our picture of the pricemovement for that stock would be one of a long advancing trend slowlybeginning to round off, holding in stationary suspense for a time, and thencommencing a retreat, reversing the previous upward movement into a newand Accelerating Downward Trend.Rounding Bottoms are commonly referred to as Bowl or Saucer Patterns.Rounding Tops are sometimes called Inverted Bowls. Despite the logic of theirconstruction, neither type appears as frequently as Head-and-Shoulders Formations. Rounding Bottoms occur most often in low-priced stocks, in an
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38363432302826
Important Reversal Patterns — Continued
85
ARCHER DANIELS MIDLAND302520
ARCHER DANIELS MIDLAND CO. ADM 1984
1510577 78 79 80 81 82 83 84
2422201918171615
NL
SS
S
S
H
Sales100’s
4000320024001600800MARCHJUNEJULYAPRILMAYAUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 1 8 15 22 29XD.035XD.035XD.035 5 % STK.
FIGURE 28. After testing its 1980 high in mid-1983, “ADM” turned sharply lower,retracing roughly 40% of the 1982–83 advance by mid-1984. The summer low, however, appeared to be a Bottom. Indeed, if one looked at the volume pattern fromApril to November and correlated it with price activity, it was not difficult to makea good case for a Complex Head-and-Shoulders Bottom. A neckline through thecloses gave us a go signal on a penetration of 20⅝.
extended, flat-bottomed form which usually takes many months to complete.There was a host of such developments during 1942 and 1943 among issuesselling under $10 a share. (It should be noted here that “Saucer” Bottoms oftwo or three months’ duration also appear frequently, one right after another,in the charts of low-priced issues during an extended up-movement. Theircharacteristics and denotations will be discussed later when we come toConsolidation.)Tops of the Rounding type are very rare among stocks in the lower- andmedium-price ranges, but are found occasionally in the charts of those highpriced common stocks which command an AA rating among wealthy investorsand do not ordinarily interest the general public. They also appear frequentlyin the charts of high-grade preferred stocks and quite naturally, because thedemand for their shares reflects chiefly two factors — supply of funds seekingconservative investment and interest rates — both of which tend to changevery slowly. The speculative appeal which produces wide-swinging price fluctuations is absent in such issues. The same line of reasoning explains whyRounding Tops almost never develop in lower-priced, speculative commonstocks; Bull Markets in those are topped off by excited public buying whichpays little or no heed to long-range investment considerations.
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28GENERAL
BRONZE
GLZ
1945
26242220
XD 20 ¢
XD 20 ¢
19
Sales100’s5040302010
DECEMBERAUGUSTJULYSEPTEMBER OCTOBER NOVEMBER7 14 21 28 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 1 8 15 21 28
FIGURE 29. An Intermediate Bottom of the Complex class, abnormal in its lack ofsymmetry but, nonetheless, easy to recognize. Low volume on reactions after headwas completed gave usual (and essential) Bullish Confirmation. The sluggish startof the new trend was a common feature of Multiple Head-and-Shoulder Reversals.
NL
1514S1312
SS
S
11
Sales100’s
HAMDAHL CORPORATION
AMH
1985
200016001200800600APRILMAYJUNEJULYAUGUSTSEPTEMBER OCTOBER3 30 6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28 5 12 19XD.05XD.05
FIGURE 30. The slide in Amdahl occupied the Bears from March–June before asharp rally gave notice that the Bulls were still alive. After that, a choppy sidewaystrading range evolved with Support near the Pullback lows established earlier in theyear. Overall, there was a fine symmetry to this chart, including volume, whichindicated the price action from March to September was actually a Broad Head-andShoulders Bottom. Entry was on a 3% breakout of the neckline with a minimumobjective of 19¾.
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Chapter seven:
Important Reversal Patterns — Contin