As of 04/19/2021
  Indus: 34,078 -123.04 -0.4%  
  Trans: 14,799 -120.71 -0.8%  
  Utils: 921 -2.88 -0.3%  
  Nasdaq: 13,915 -137.57 -1.0%  
  S&P 500: 4,163 -22.21 -0.5%  
YTD
 +11.3%  
 +18.3%  
 +6.5%  
 +8.0%  
 +10.8%  
  Targets    Overview: 04/15/2021  
  Up arrow34,800 or 32,900 by 05/01/2021
  Up arrow15,200 or 14,000 by 05/01/2021
  Up arrow950 or 885 by 05/01/2021
  Up arrow15,000 or 12,900 by 05/01/2021
  Up arrow4,400 or 3,900 by 05/01/2021
CPI (updated daily): Arrows on 3/25/21
As of 04/19/2021
  Indus: 34,078 -123.04 -0.4%  
  Trans: 14,799 -120.71 -0.8%  
  Utils: 921 -2.88 -0.3%  
  Nasdaq: 13,915 -137.57 -1.0%  
  S&P 500: 4,163 -22.21 -0.5%  
YTD
 +11.3%  
 +18.3%  
 +6.5%  
 +8.0%  
 +10.8%  
  Targets    Overview: 04/15/2021  
  Up arrow34,800 or 32,900 by 05/01/2021
  Up arrow15,200 or 14,000 by 05/01/2021
  Up arrow950 or 885 by 05/01/2021
  Up arrow15,000 or 12,900 by 05/01/2021
  Up arrow4,400 or 3,900 by 05/01/2021
CPI (updated daily): Arrows on 3/25/21

Bulkowski on Busted Head-and-Shoulders Tops

 

Updated with new statistics on 12/28/2020.

The third edition of this book Encyclopedia of Chart PatternsEncyclopedia of Chart Patterns. has a table in most chapters discussing busted pattern performance.

$ $ $

Busted Head-and-Shoulders Top: Summary

Busted head-and-shoulders tops are head-and-shoulders tops in which price breaks out downward and drops no more than 10%, turns around, and then closes above the top of the head-and-shoulders.

Busted head-and-shoulders tops (all varieties: single, double, and triple or more busted) see price gain an average of 35%. Single busted patterns gain an average of 67%.

Busted Head-and-Shoulders Top: Single Bust

Picture of Headwaters (HW) on the daily scale.

Busted head-and-shoulders tops come in three varieties: single busts, double busts, and three or more busts.

Single busted head-and-shoulders tops look like the chart on the right, from Headwaters (HW), on the daily scale. Price forms a head-and-shoulders top which confirms as a valid head-and-shoulders when price closes below the chart pattern's neckline. That happens at A.

Price doesn't drop far before recovering and closing above the top of the chart pattern, at B. This busts the head-and-shoulders top.

Price continues rising more than 10% above the blue line, to C.

For a single bust, look for:

  1. Price must confirm the head-and-shoulders top by closing below the neckline (or right armpit if the neckline slopes downward, as in this case) of the head-and-shoulders top (that happens at A in this example).
  2. Price must drop no more than 10% below the breakout price of the head-and-shoulders top.
  3. Price rises and closes above the top of the head-and-shoulders top (B).
  4. Price continues rising more than 10% (C).

The last point, 4, means the ultimate high must be more than 10% above the top of the head-and-shoulders top. If price fails to climb more than 10%, then it could be forming a double bust.

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Busted Head-and-Shoulders Top: Double Bust

Picture of Con-way (CNW) on the daily scale.

The chart of Con-way (CNW), pictured on the daily scale, shows an example of a double busted head-and-shoulders top.

Price forms a head-and-shoulders top chart pattern that confirms when price closes below the up-sloping neckline, at A.

Price does not drop far before it rises and closes above the top of the chart pattern, at B. This busts the head-and-shoulders top for the first time.

Price rises less than 10% above the top blue line (the top of the chart pattern) before tumbling to C. C is the next close below the bottom of the chart pattern. This busts the head-and-shoulders top a second time. Price then continues down at least 10% (D), completing the busted count at two.

For a double bust, look for these elements.

  1. Price must confirm the head-and-shoulders top by breaking out downward: closing below an ups-sloping neckline or armpit when the neckline slopes downward (A).
  2. Price must drop no more than 10% as measured from the breakout price.
  3. Price rises and closes above the top of the head-and-shoulders top (this happens at B).
  4. Price fails to rise more than 10% above the highest peak in the head-and-shoulders top before reversing.
  5. Price closes below the lowest valley in the head-and-shoulders top a second time (point C).
  6. Price drops more than 10% below the bottom of the chart pattern (the drop toward D).

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Head-and-Shoulders Top: Triple Bust

Picture of Delpha Financial Group (DFG) on the daily scale.

Triple busts are rare, but the word triple is misleading. I counted every pattern that had three or more busts.

The chart of Delphi Financial Group (DFG) is an example of a multiple bust head-and-shoulders top.

The head-and-shoulders confirms when price closes below the neckline at A.

After that, price rebounds to B where it closes above the top of the chart pattern. That represents the first bust. Price rises less than 10% before tumbling to C, the next close below the bottom of the head-and-shoulders top.

Again, price drops less than 10% below the bottom blue line (signifying the lowest low in the chart pattern) before rising to D. D is the next close above the top of the chart pattern, busting it for the third time. If price rises more than 10% above the top of the chart pattern then the busted counting ends, otherwise it continues. I stopped counting at three for research purposes. Delphi busts a fourth time in this chart.

For a triple (or more) busted head-and-shoulders top, look for the following:

  1. Find a double busted pattern in which price, after the second bust, fails to drop more than 10% below the bottom of the head-and-shoulders top. That is point C in the figure.
  2. Price rises and closes above the top of the head-and-shoulders top (D).
  3. Price must rise more than 10% above the top blue line to stop the busted count at three. If not, then additional down and up cycles (each no more than 10% from the nearest blue line) may continue, busting the head-and-shoulders top.

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Busted Head-and-Shoulders Top: Performance

Here's a few statistics from the book. This is for head-and-shoulders tops with downward breakouts (so they bust upward).

Busted Head-and-Shoulders Top: Trading

Picture of Church and Dwight (CHD) on the daily scale.

I show a chart of Church and Dwight (CHD) on the daily scale.

A head-and-shoulders top confirms when price closes below the neckline at A. Price drops to B, which is less than 10% below the breakout price of the chart pattern, and then rises above the top of the chart pattern, at C. This busts the head-and-shoulders top.

To trade this busted chart pattern, place a buy order a penny above the head (the highest high in the chart pattern). That will get you into the stock automatically. The order fills at 36.25.

When you decide to sell is up to you. As I write this (October 27, 2011), the stock is near to making a new high at 45.52, for a potential gain of 26%.

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-- Thomas Bulkowski

See Also

 

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My novels:  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Trading Classic Chart Patterns

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