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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