Here we show excerpts from our introduction to Technical Analysis, including explanations of basic concepts, such as signals and price patterns, and details of key TA indicators.
Part 14: Monday 23 January 2012
The peaks between the head and either shoulder can be joined by a line extending to the right.
A break above the line after the right shoulder is considered to complete the pattern and implies higher prices. Of course, potential resistance from either of the two peaks could come into effect.
Waiting for a break of these resistance levels gives a further confirmation but a worse entry level.
The double and triple top (or bottom) reversal patterns are similar in that they involved a market that fails to make a significant new high and then breaks an intervening low or lows. They are just classified versions of the trend reversal criteria laid out in chapter two.
Additional clues during the formation of these patterns that they are not part of a trend continuation can come from volume and momentum indicators.
These will be described in the next chapter but it is enough for the moment to say that if these indicators show weakness at tops, the trend may not continue and a top formation could be in the making.
The inability of a market to push far beyond the simple buy and sell signals given can also be an indication that a trend may not continue.
For the S&P 500 Index, the market low in 2002 was a ‘sell’ signal that failed to hold at the low.