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Atlas Iron potentially setting up for Head and Shoulders reversal

Atlas Iron potentially setting up for Head and Shoulders reversal

Hello everyone,

one of the more popular and well known technical signals is the Head and Shoulders (H&S) setup. This occurs at the end of a trending move when the price makes 3 peaks - the highest of which is in the middle and becomes known as the head. The peaks on either side of it are known as the shoulders. The basic idea is that the trader is looking for this type of signal to show that the trends is either resting or breaking down altogether.

Like all patterns though, the identification is only a small part of the setup. The next thing that needs to be considered in the entry point for this pattern - the aptly named neckline.

The neckline connects the troughs as you can see in the chart above. This is the point at which the trader will be thinking that the trend may have entered into a state of negativity - how long it lasts will of course remain unknown.

Like many types of technical patterns that you will come across there is a profit targeting method taken by measuring the height of the pattern. In this case, the height of the peak of the head measured to the neckline is the way that it's measured. On the AGO chart the height is about $0.43. This is then extrapolated from the breakout and that forms the first profit target for the trader.

As always the trader will want to filter their entry to try and avoid a whipsaw - this may mean something like waiting for a close outside of the pattern. It's tricky to give specific direction here because each trade behaves so differently.

We love to get your comments but let me know how you deal with the trials of attempting to avoid whipsaws on entry.

Follow Ric and me on Twitter at RicCharts and DaveCharts - BTW you can subscribe to the blog and receive every post hot off the press - just drop your email into the box on the home page.

All the best

Dave.