BEARISH HEAD AND SHOULDERS PRICE PATTERNS

              Recognizing head/shoulders patterns and learning how
     to play them is a key part of making successful short sale
     trades.  First, recognize the pattern.  After the first decline,
     there is often a weak rally back to the 65-dma.  When prices
     turn back down from it, sell short again when the IP21 drops
     below its 21-dma or the Closing Power breaks its minor uptrend.
     You can also wait for prices to break their minor support.
     This decline will often test the bottom of the developing down-
     trend channel.   EHTH below shows these developments in a
     a still uptrending general market.  Properly taken short sales
     can be quite profitable even in what is a bull market for the DJI
     or SP-500.

                         Recognizing Head/Shoulder Tops.

         Our software does not automatically spot head/shoulders tops.   You will need to
           be able to spot them yourself.  Look at the charts in this section.  See the variations
           on this theme that they provide.  This will help you gain the necessary confidence
           to recognize and trade them.





           

           Neckline and 65-dma Violations Ordinarily Complete The Pattern

            A close below the neckline and also the 65-dma completes the pattern and
            increases the chances for a significant decline.   Quite a few head/shoulders
            patterns turn back up from the 65-dma if the Accumulation is high
            or there is no major Peerless sell at the same time.

            In bear markets when the DJI declines more than 20%, having a high
            Accumulation Index will not save a stock with a clear head/shoulders
            pattern from falling dramatically.  Examples in 1987: AVP, BMS and CAT
            and in 1990: AET, BA, IPG, JCC, NSM and PEP.  When there have
            not been multiple Peerless Sells and a support failure, avoid shorting
            stocks that show high Accumulation.
            (See http://www.tigersoft.com/KSS-ShortSaleBook/1987-HS/index.html  
            and www.tigersoft.com/KSS-ShortSaleBook/1990-HS/index.html )

            Sample head/shoulders:

                   What Accentuates the Bearishness in A H/S Pattern

            Head/shoulders are more likely to bring short sales profits if there has
            been an earlier H/S pattern in the year.  This increases the bearish potential.
            It shows more distribution.  Avoid big losses with a H/S pattern by vowing
            to cover if the stock closes back above the 65-dma and the Closing Power
            is no longer in a downtrend.  When Red Distribution is still very apparent,
            use a close by the stock above the previous right shoulder's apex to close
            out short positions.   See ANV below in June 2011.




                                        Downside Potential

            Classic technical analysis says the height ot the price pattern from its
            apex down to the neckline gives a point-count that should be applied from where
            the neckline is finally broken.  This calculates the so called "minumum
            downside price objective" for a completed H/S pattern. 

            In a "normal" intermediate-term decline by the DJI of 8%-13.5%,
            it is amazing how often this is exactly how far prices do drop before
            turning back up.   Consider 1988, a year when declines by the DJI
            did not exceded 12%.

            Examples where post-H/S decline fell just to minimum downside objective:
            1988  AA, CLX, CPB, DD, DOW, DUK, FDX, HAL, HUM, JCP.  KMB,
            NOC, NUE, R, RRD, SUN (n=16)

            Contrary examples where the post H/S decline fell significantly below the
            minimum downside objective:
            1988: AAPL, BHI, HRL, PPL, RSH, SHW (n=6)

             Examples where the post H/S decline failed to fulfill minimum downside objective
             1988: BA, MMM, MWV,  UTX (n=4)
             (See http://www.tigersoft.com/KSS-ShortSaleBook/1988-HS/index.htm )

            Understand that in a serious DJI decline, prices will mostly drop far below
            minimum downside objective.  See
            1987: AA, CAT, CI,   DIS, F,  GD, HES, HON, HUM. IFF, JWN, K, KO,
            LNC, LOW, LUV, MAT, MHP, MKC, MO, MRK, MUR, NTRS,  NYT,
            RRD, RSH,  S, SIAL, SNA, TAP, TMO, TXN, USB, UTX, WAG, X (n=36)
            in 1987, prices only fulfilled their downside objective in two cases:
            CLX, PEN
            (See http://www.tigersoft.com/KSS-ShortSaleBook/1987-HS/index.html )

            Markedly lower Accumulation on the right shoulder adds to the bearishness,
            as does a price gap down on red high volume when the neckline is broken.
            Most of the significant H/S patterns are built over a 3-week to 6 month
            time interval.   But be aware of the "mighty mouse" miniature patterns
            that last only 10 or 12 days and the weekly head/shoulders patterns that
            can last longer than 30 weeks to complete.

            Earlier head/shoulders patterns in the same year, definitely ripen a
            stock for an even bigger decline.  The same thing is true when a larger
            head/shoulders pattern has imbedded smaller patterns built into
            its formation.   See the 1987 H/S patterns for many examples of both
            of these phenomenona.
         
            When Peerless gives a Sell and the DJI declines, stocks with H/S
            patterns normally go down much more quickly than other stocks
            once the neckline is broken.  I have studied the H/S patterns in SP-500
            stocks from 1987 to 2012.  Any glance at this many H/S patterns should
            convince you about the reliability of usefulness as bearish signs
            to sell short. 

                                          A Multi-Varied Pattern

            As you can see from these many examples, perfect symmetry between
            the right and left shoulder is relatively rare.  And does not matter much. 
            The same is true whether the neckline slopes moderately up or down. 

            More important is the amount of red Distribution on the right shoulder. 
            Its presence confirms the pattern's bearishness from the point of view of
            insiders and their friends.   Very Blue Accumulation Index readings will not
            prevent a H/S shoulder from bringing a significant decline in a weak
            general market, but will help hold the stock up if the general market
            is not weak.

            Often the H/S price pattern forms way above the 65-dma.  When this
            happens, the decline often stops at the rising 65-dma.  The 65-dma
            often acts as support even after a H/S pattern's decline has been
            violated.  For this reason, it is usually best to not consider a H/S price
            pattern completed until the 65-dma is closed below.

            When prices do break the neckline and the 65-dma, they usually
            fall quickly.   However, in perhaps 35% of the cases there is a
            "pullback" back up to the broken neckline or 65-dm before the
            decline resumes in earnest.   We like to short these as soon as
            the Closing Power hooks back down when prices have failed at
            the 65-dma.  

            H/S patterns can occur in any general market environment.   They can
            cap a long bull market or occur on a brief rally in the middle of a
            bear market.  Head/shoulders often appear with the DJI, SPY, NASDAQ, NYSE
            and OEX.  When prices rupture the neckline, they produce very tradeable declines.
            All the averages produced compact H/S patterns right before the
            mini-crash of 2010.   Many traders come to rely on them, perhaps, too much.
            Stocks and general markets can also decline without their appearance.

         .  Compare the outcome of the completed head/shoulders pattern
            in VLO (below) during the 2013  bull market with head/shoulders patterns
            at the start of general bear markets in 1987(AA), 1990(LOW), 1998 (CL),
            2000 (CSC), 2002 (GR) and 2008 (HOT). 

            It is a fact that these patterns cannot be searched for by the computer,
            except to examine one by all the stocks that have just violated their 21-day
            or 65-dma.  Then note the ones that have just completed a head/shoulders pattern. 
            While this sometimes making a short sale a day or two after the neckline has
            been violated, the Power Ranker lets you easily find the weakest of these,
            those with the lowest IP21 score and those with the bearish "Both Down"
            condition (both Opening and Closing Power are falling.)      

            Examples   
                        See       DJIA Head/shoulders patterns
                                    SPY Head/shoulders patterns

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         Diamond Top Patterns and Hands-above-the-Head Patterns are really variations
         of the classic Head/Shoulders pattern.   The same rules apply.