Senwes Scenario April / May 2017 | Page 45

••• • • CO L UMN • • Graph 1: Double Top SOURCE: COMPILED BY AUTHOR Graph 2. Head and Shoulders. SOURCE: COMPILED BY AUTHOR prices have tested the resistance level (support level) various times and should it then break through the support level (resistance level), a new trend would form in the opposite direction to the preceding trend. A reversal in the trend is normally confirmed by an increase in trading volumes and it is recommended that trading vol- umes be analysed in conjunction with Tops and Bottoms. Graph 1 is a graphic representation of a Double Top. Head and Shoulders This formation is definitely one of the most popular formations amongst technical analysts, since the formation can be analysed over any period of time. For this reason it is the ideal formation for both short-term and long-term market participants. Both a Head and Shoulders and Inverse Head and Shoulders are interpreted on the same basis. The basic concepts of a Head and Shoulders are explained here. The formation is made up of five char- acteristics (as represented graphi­ cally in Graph 2): strong preced- ing trend, left shoulder, head, right shoulder and neckline. The same interpretation applies in respect of an Inverse Head and Shoulder-formation, which forms at the end of a strong downward trend. 2 i. The Head and Shoulders for- mation can be interpreted more accurately if the for- mation forms at the end of a strong upward trend 2 . As a rule of thumb, a trend reversal will be more significant if the preceding trend forms over a longer term. ii. The left shoulder of the for- mation forms where prices reach a new high, but recover in order to form a higher low within the preceding trend. iii. From the low of the left shoul- der, prices increase to form a new high. Buyers are not able to maintain this sharp increase > CONTINUES ON PAGE 44 SENWES Scenario • APRIL/MAY 2017 43