As of 11/26/2021
  Indus: 34,899 -905.04 -2.5%  
  Trans: 16,216 -610.57 -3.6%  
  Utils: 907 -15.90 -1.7%  
  Nasdaq: 15,492 -353.57 -2.2%  
  S&P 500: 4,595 -106.84 -2.3%  
YTD
 +14.0%  
 +29.7%  
 +4.9%  
 +20.2%  
 +22.3%  
  Targets    Overview: 11/12/2021  
  Up arrow38,000 or 35,000 by 12/01/2021
  Up arrow17,700 or 16,000 by 12/01/2021
  Up arrow935 or 890 by 12/01/2021
  Up arrow16,400 or 15,350 by 12/01/2021
  Up arrow4,850 or 4,560 by 12/01/2021
CPI (updated daily): Arrows on 11/17/21
As of 11/26/2021
  Indus: 34,899 -905.04 -2.5%  
  Trans: 16,216 -610.57 -3.6%  
  Utils: 907 -15.90 -1.7%  
  Nasdaq: 15,492 -353.57 -2.2%  
  S&P 500: 4,595 -106.84 -2.3%  
YTD
 +14.0%  
 +29.7%  
 +4.9%  
 +20.2%  
 +22.3%  
  Targets    Overview: 11/12/2021  
  Up arrow38,000 or 35,000 by 12/01/2021
  Up arrow17,700 or 16,000 by 12/01/2021
  Up arrow935 or 890 by 12/01/2021
  Up arrow16,400 or 15,350 by 12/01/2021
  Up arrow4,850 or 4,560 by 12/01/2021
CPI (updated daily): Arrows on 11/17/21

Bulkowski on Busted Head-and-Shoulders Bottoms

 

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 Bottom: Summary

A stock forms a head-and-shoulders bottom which confirms as a valid pattern when price closes above the neckline or right armpit (depending on neckline slope). Price rises no more than 10% before dropping and closing below the bottom of the chart pattern. This busts the upward breakout.

For busted patterns in bull markets, the average drop is 13. If you trade a single busted head-and-shoulders bottom, the average decline is 22%. Those are the results from perfect trades.

Head-and-Shoulders Bottom: Single Busted

Picture of Stillwater Mining (SWC) on the daily scale.

The figure shows Stillwater Mining (SWC) on the daily scale, an example of a single busted head-and-shoulders bottom. Price breaks out upward from the chart pattern at A, but does not rise far. The stock tumbles to B where it closes below the bottom of the chart pattern (below the head). This busts the pattern.

Price in this example recovers but does not exceed the top of the head-and-shoulders. Instead, price continues lower more than 10% below the bottom of the head-and-shoulders. That ends the bust counting at one.

To identify a single busted head-and-shoulders bottom, look for:

  1. Price must confirm the head-and-shoulders bottom by closing above the neckline (down sloping necklines) or above the right armpit. That occurs at A in the figure.
  2. Price must rise no more than 10% above the neckline.
  3. Price then closes below the bottom of the head-and-shoulders bottom (B).
  4. Price continues dropping more than 10% without closing above the top of the head-and-shoulders.

If price fails to drop more than 10% below the bottom of the head-and-shoulders bottom, then it could be forming a double bust.

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Head-and-Shoulders Bottom: Double Busted

Picture of MGE Energy (MGEE) on the daily scale.

I show a chart of MGE Energy (MGEE) on the daily scale. Price forms a head-and-shoulders bottom on the left side of the chart. Since the neckline, which normally connects the two armpits, slopes upward (not shown), I use a close above the right armpit to validate the chart pattern. That happens at A.

Price eventually drops to B and closes below the head. This busts the head-and-shoulders bottom for the first time. Price drops less than 10% below the head before recovering and closing above the top of the chart pattern. That happens at C. Price eventually continues rising more than 10% above the top of the chart pattern.

For a double bust, look for these elements.

  1. Price must confirm the head-and-shoulders bottom by closing above the neckline or right armpit (A).
  2. Price rises no more than 10% before reversing.
  3. Price closes below the bottom of the chart pattern (B). This busts the pattern for the first time.
  4. Price drops no more than 10% below the bottom of the head-and-shoulders bottom.
  5. Price closes above the top of the head-and-shoulders bottom. This busts the chart pattern for the second time (C).
  6. The stock rises more than 10% above the top of the head-and-shoulders bottom.

A double busted head-and-shoulders bottom turns into a triple bust when the rise after the second bust is no more than 10% and price then closes below the bottom of the chart pattern.

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Head-and-Shoulders Bottom: Triple Busts

Picture of Monsanto (MON) on the daily scale.

I show a picture of Monsanto (MON) on the daily scale. Since the neckline slopes downward (the diagonal blue line that looks black), a close above this line confirms the head-and-shoulders bottom as a valid chart pattern. That happens at A.

Price does not rise much before collapsing and busting the chart pattern for the first time at B. Price drops little before zipping up to C, which is a close above the top of the chart pattern. This busts the head-and-shoulders bottom for the second time.

Again, price rises no more than 10% before reversing and closing below the bottom of the chart pattern, at D. That busts the pattern for the third time. From there, I stop counting the busts.

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

  1. Find a double busted head-and-shoulders bottom except that price fails to rise more than 10% after the second bust (the rise above the top red line at C). In this example, B is the first bust, and C is the second.
  2. Price closes below the bottom of the chart pattern, busting the pattern for the third time (D).
  3. Price may continue to bust the pattern if it crosses the pattern and then fails to move more than 10% above the top or below the bottom of the chart pattern. The busted count stops whenever the move is more than 10% above or below the head-and-shoulders bottom.

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Busted Head-and-Shoulders Bottom: Performance

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

Busted Head-and-Shoulders Bottom: Trading

Picture of Metalico (MEA) on the daily scale.

I show a picture of Metalico (MEA) on the daily scale. The head-and-shoulders bottom is shown with a blue neckline connecting the two armpits.

Price confirms the chart pattern when it closes above the neckline at A. Price rises only to B before tumbling.

When price closes below the bottom of the chart pattern, which I show as a horizontal blue line at C, it busts the chart pattern for the first time. Price continues lower to D and then on to E.

If you place an order to short the stock a penny below the head, you would have entered the trade at 5.28. Since a straight-line run developed, placing an order to cover the short a penny above the prior candle's high would exit the stock at D, at 4.56 for a gain of almost 14%.

If you were lucky enough to exit at E, the gain would have been 31%.

-- Thomas Bulkowski

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See Also

 

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