Head and Shoulders Failures

Head and Shoulders (H&S) failure and is usually followed by an explosive rally.

Sometimes the price action exhibits all the characteristics of an Head and Shoulders (H&S) distribution pattern, but it either refuses to penetrate the neckline or penetrates it temporarily and then starts to rally. This represents an Head and Shoulders (H&S) failure and is usually followed by an explosive rally.

It is probably due to misplaced pessimism. Once the real fundamentals are perceived, not only do new buyers rush in, but also traders holding short positions are forced to cover. Since fear is a stronger motivator than greed, these bears bid up the price very aggressively.

The failure of an Head and Shoulders (H&S) pattern results in a fairly worthwhile rally. Nevertheless, an Head and Shoulders (H&S) that does not work indicates that while there is still some life left in the situation, the end may not be far off.

Unfortunately, the pattern itself gives no indication that it is going to fail. Sometimes such evidence can be gleaned from other technical factors. For example, if a countertrend signal looks as if it may be taking place, this is just as likely to result in a failure.

Failures used to be fairly rare, but now seem to be more common, which indicates the necessity of waiting for a decisive breakout on the downside. If any action is contemplated, it should be taken when the price breaks above the right shoulder on heavy volume. Usually, such signals offer substantial profits in a very short period of time and are well worth acting on.

Inverse Head and Shoulders (H&S) patterns can also fail. Again, the failure is usually followed by an extremely sharp sell-off, as participants who bought in anticipation of an upward breakout are flushed out when the new bearish fundamentals become more widely known.