CHARTING
Detecting Trend Changes?Does The Head & Shoulders Formation Work?
by Martin Boot
Rarely will you come across a technique that detects an imminent change in trend, but here's a method that can help you do just that.
The head and shoulders pattern has long been considered one of the most reliable in technical analysis. That should mean that more often than not, every trader can make high returns on their holdings. Unfortunately, it's not that simple.
I am engaged in a major research project involving statistical analysis of 8,513 New York Stock Exchange (NYSE) and Nasdaq stocks over a four-year period. I test well-known technical indicators as well as technical patterns, and the results have been revealing. They seem to be more in sync with daily trading practices than other results I have found in the literature. Recently, I completed my study of the well-known head and shoulders pattern, which is considered to indicate and even predict a change in trend. Here are the results.
THE PATTERN
The head and shoulders pattern caught my attention after I read Thomas Bulkowski's article in the August 1997 Technical Analysis of STOCKS & COMMODITIES, in which he evaluated 300 stocks over a two-year time span. In it, Bulkowski reported an 83% success rate with the pattern. You can easily define this kind of pattern in a computer program and instruct the computer to trade broken necklinesÝ. Using logic from TechniFilter Plus (see sidebar, "Head and shoulders top report") for identifying them, I decided to write a program to trade the head and shoulders pattern.
...Continued in the April 2002 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the April 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.
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