Sunday, January 2, 2011

Double Top and Head & Shoulder Pattern

Chart pattern is used extensively by traders to identify candidates that are likely to make a big move either upwards or downwards.  Traders need to look out for two important patterns in 2011 in order to avoid being hit by a sell down.  These two patterns are the double top formation and the head and shoulder formation

Conditions for double top formation
  1. Stock is in an uptrend
  2. Forms a high that is lower than the previous high
  3. Drops below the valley between the two highs
Conditions for head and shoulder formation
  1. Stock is in an uptrend
  2. Stock makes a lower high compared to the previous high
  3. Stock drops below the neckline between the two shoulders pattern
Note that for these two patterns, the stock price needs to drop below the valley or neckline in order for the pattern to be valid.  Once the formation is complete, the price will usually go down dramatically as these two patterns are closely watched by the bears to identify candidates to short.  

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