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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
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SENWES Scenario • APRIL/MAY 2017
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