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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's Pattern Review 4

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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

My book, Encyclopedia of Chart Patterns Second EditionEncyclopedia of Chart Patterns 2nd Edition book., shown on the left, discusses the performance statistics and details of 63 event and chart patterns. There is no better reference for chart and event patterns.

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Chart Pattern Review 4: Introduction

I wrote this article for Active Trader magazine in July 2005 as part four of a series. They accepted it for publication, but never printed it nor paid for the work to write it (no kill fee). Insert your favorite expletive. So, I am posting the full article here.

Picture of the various chart patterns.

The above figure shows six chart patterns, four of them are head-and-shoulders and two are horns.

Head-and-shoulders are old-timers, having been around for decades, but horns are still youngsters. The head-and-shoulders top is a bearish reversal pattern with almost half breaking out near the yearly high in a bull market. The head-and-shoulders bottom is an inverted head-and-shoulders top. It's also a reversal pattern that forms most often in the middle of the yearly price range. The complex head-and-shoulders are head-and-shoulders patterns with additional heads, additional shoulders, but rarely both. The figure shows a complex head-and-shoulders with two heads. Complex head-and-shoulders patterns breakout most often in the middle of the yearly trading range.

Finally, horn tops and bottoms are twin spike patterns separated by a bar on the weekly scale. The daily scale also shows horns, but they are not as reliable as those appearing on the weekly charts.

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Chart Pattern Review 4: Head & Shoulders Tops

Picture of the various chart patterns.

The figure shows a head-and-shoulders top. A head-and-shoulders top appears after an upward price trend and acts as a reversal as the word "top" implies. Price rises to the left shoulder and stalls at the peak, retraces to form the left armpit at A. Price climbs to the head - a peak that towers above the two shoulders - then drops to the left armpit before rising to the right shoulder high. The pattern confirms as a valid head-and-shoulders when price closes below the neckline joining the two armpits (shown as A and B).

Symmetry between the two shoulders in shape, distance from the head, and price is important. The two shoulders usually appear similar - both slender spikes or both fat ones. The distance from the left shoulder to the head should be close to the distance from the head to the right shoulder. Finally, the two shoulders should top out near the same price. Allow variations in shape, distance, and price. The shape should mimic a person: you don't often see a person with uneven or unusual looking shoulders and head.

Volume is highest on formation of the left shoulder followed by the head. However, don't toss out a head-and-shoulders with high right shoulder volume. The head-and-shoulders top still represents a bearish chart pattern.

The neckline joining the shoulder armpits can slope in any direction. If it slopes upward or horizontally, a trade signals when price closes below it. For downward sloping necklines, use the right armpit low (point B in Figure 2) as the breakout point.

Few head-and-shoulders patterns fail to signal a sustained downward move, but pullbacks to the neckline occur between half (bull market) and two-thirds (bear market) of the time. To estimate how far price will decline, find the height as the vertical distance from the high at the head to the neckline directly below. Subtract the height from the breakout price (either a neckline break or the right armpit low) to get a target. Unfortunately, this method works only half the time, so use half the pattern height projected downward from the breakout price instead. Look for nearby support as a likely turning point.

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Chart Pattern Review 4: Head & Shoulders Complex Tops

Picture of the various chart patterns.

The figure shows a complex head-and-shoulders top (CHST). The complex variety is a regular head-and-shoulders with additional shoulders, additional heads or - rarely - both. Additional shoulders appear in symmetrical pairs - not three left shoulders and only one right shoulder. The figure shows two left shoulders and two right ones. The earlier figure shows what a CHST with a dual head looks like.

To identify a CHST, find a regular head-and-shoulders top then look for additional shoulders or heads. Additional shoulders appear more often than additional heads. The head peak is often not as high as in the simple head-and-shoulders variety, so the CHST looks like someone stepped on it.

Shoulder symmetry is strong in CHSTs. Each shoulder mirror will appear similar in shape, distance from the head, and price. Volume tends to be higher on the left side of the pattern than on the right and often high beneath formation of each shoulder.

The neckline joining the lowest armpits is usually horizontal or nearly so (line 2 in the figure). A trade signals when price pierces the up or horizontal sloping neckline or closes below the right armpit in the CHST for down-sloping necklines. You can also trade the inner head-and-shoulders instead of waiting for the CHST sell signal. That's the difference between taking a signal when price pierces neckline 1 versus neckline 2. Both are valid trading signals.

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Chart Pattern Review 4: Head & Shoulders Bottoms

Picture of the various chart patterns.

Head-and-shoulders bottoms (HSBs), like the one shown in the figure, are similar to head-and-shoulders tops, only inverted. The same identification rules apply, namely that a head appears below the two shoulders, the shoulders should appear symmetrical in shape, distance from the head, and bottom near the same price.

Volume is highest on the left shoulder or head and diminished on the right shoulder. The neckline connects the armpit peaks and slopes in any direction.

A trade signals when price closes above a down- or horizontal-sloping neckline, or closes above the right armpit peak when the neckline slopes upward. Throwbacks like the one shown in the figure occur 45 percent of the time in a bull market (based on statistics to 2005). Testing shows that when a throwback occurs performance suffers, but your situation may vary. Look for overhead resistance to gauge whether or not a throwback will occur.

Use the measure rule to determine a target price. Compute the height from the head low to the neckline directly above and add the height to the breakout price. The result is the target price. The measure rule works only 74 percent of the time in a bull market, so multiply the height by 0.74 and add the result to the breakout price. That will yield a closer target.

Place a stop loss order below the lower of the two shoulders unless it's too far away from the buy price. Price often finds support near the shoulder valleys.

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Chart Pattern Review 4: Head & Shoulders Complex Bottoms

Picture of the various chart patterns.

The figure shows a complex head-and-shoulders bottom (CHSB). It's a HSB with additional shoulders (often) or heads (rarely). Look for symmetrical shoulders (shape, distance from head, and price) and a near-horizontal neckline. Volume is usually higher on the left side of the CHSB than on the right although it can be high on formation of each shoulder.

A breakout occurs, and a trade signals, when price closes above a horizontal or down-sloping neckline, or closes above the highest armpit (point A in Figure 5) when the neckline slopes upward. To get in early, trade the inner head-and-shoulders bottom instead of waiting for price to pierce the outer neckline of the CHSB.

The measure rule works the same way as in other head-and-shoulders patterns - the distance from the head bottom to the neckline, measured vertically and added to the breakout price. This also works 74 percent of the time, so you can apply that percentage to the height to get a closer and more accurate price target.

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Chart Pattern Review 4: Horn Tops

Picture of the various chart patterns.

The left image in the figure shows a horn top - twin price spikes poking upward on the weekly scale separated by a single bar. Horns appear on other time scales, but they perform best when they appear on the weekly charts. Look for the horn spikes to appear well above the surrounding price landscape, including the bar between the spikes. The spikes should be unusually long, longer than most spikes over the prior year. The tops of the horn need not end at the same price and often don't. A large price difference between the two spikes means slightly better performance, on average.

The pattern confirms as a horn top when price closes below the lowest low in the three-bar pattern. The best performing horn tops appear after a long price uptrend; they often signal a lasting reversal.

The measure rule computation for horn tops is the height of the pattern from the highest spike to the lowest low subtracted from the lowest low. Price reaches the target 70 percent of the time in a bull market, so look for nearby support to determine where price is likely to stall or reverse.

For trading, wait for price to close below the lowest low in the pattern before trading. Again, look for the horn to appear after a price uptrend of several months. If price is in a long downtrend, a horn top may appear at the peak of a short-term upward retrace of that decline.

Oddly, if volume is below average on both spikes in a bull market, the pattern tends to perform better than other combinations of spike volume. Horns that appear in a rising price trend tend to signal a price reversal within two months.

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Chart Pattern Review 4: Horn Bottoms

The right side of the figure shows a horn bottom and it looks like an inverted horn top. Find horns on the weekly charts and flip to the daily or intraday charts for trading. The twin downward spikes should be longer than most spikes over the prior year. The longer the spikes (the taller the pattern) the better the post-breakout performance, on average. Look for clear visibility surrounding the spikes, meaning that the bottom should look like a price reversal not part of a congestion area. The spikes should be well below the surround price landscape. Horn bottoms often appear near the end of declines but sometimes show at the bottom of retraces in uptrends. The pattern confirms as a valid one when price closes above the highest high in the 3-bar pattern.

For the measure rule, compute the height from highest high to lowest low in the pattern and add the difference to the highest high. Price reaches the target 76 percent of the time in a bull market. In a bull market, horn bottoms are middle of the pack performers meaning that they fail more often and price doesn't move as far many other chart patterns with upward breakouts. Use caution when trading them. The horn bottom may not call the turn exactly, but will usually be within a dollar or so of the actual bottom.

Chart Pattern Review 4: Closing Position

The head-and-shoulders top is a popular chart pattern because it performs so well. In performance tests against 21 other chart patterns with downward breakouts, the average decline is second only to the CHST. Both the head-and-shoulders top and the CHST are ranked second in terms of failure rate (meaning price tends to make a meaningful plunge after confirmation). Nevertheless, anything can happen in turbulent markets. Chart patterns perform best when the breakout is in the direction of the general market and moving in concert with other stocks in the same industry. Use those as additional indicators before trading.

-- Thomas Bulkowski

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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. If it is worth doing, it is worth overdoing.