Trading Failed Chart Patterns - H&S     1/08/2016 8.45am

HS Most traders are familiar with trading chart patterns and its predictable targets and stops. When patterns fail to reach the pre-determined target levels the pattern becomes a 'Failed Pattern.' There are multiple categories of 'Chart Patterns Failure' but we may get to them in another blog post.

'Failure' word sounds painful but understanding the knowledge and potential opportunity it offers and its risk/reward, traders could use 'Pattern Failure' to their advantage and benefit from it. 'Failed Patterns' provide more reliable signals than original 'patterns' in most conditions.

In this example, I would like to discuss current (Jan. 2016) Dow Jones Transportation Index ($TRAN) Inv. Head & Shoulders pattern.

Most of the year 2015, $TRAN (Transport Index) were relatively flat to downtrend mode agreeing with market theory that Transports lead market indexes. From April 2015 to Dec. 2015, $TRAN formed an Inv. Head and Shoulders Pattern. When I first saw its formation in late Aug. 2015, I was certain Market indexes are going to rise to new highs by the end of 2015, thinking Inv. HS would breakout above Neckline 8320 and rise higher. In Nov. 2015, $TRAN did breakout above Neckline 8320, but not closed above Neckline. Usually multiple closes above Neckline signals a confirmation of breakout. A break above Neckline but no close "SHOULD" have been a failure signal. Well, as most traders, I ignored it and caught up in the "bulllish close for 2015" fever like many other traders.

Late November 2015, $TRAN started to decline from neckline breakout failure and started to drift lower. In Head and Shoulders (or Inv. HS) patterns there are two failure levels. 1. The mid point between the RIght-Shoudler and 2. Neckline and Right Shoulder High (in case of HS) or Low (in case of InvHS). Once price trades below or above Right Shoulder High/Low the HS pattern is considered Failed.

Once pattern fails, usually the moves from the failure levels are quick and volatile. In failed H&S Patterns, the first level of target is set at 100% depth from the Right Shoulder Low/High.

$TRAN Inv. HS pattern failure shows how $TRAN signaled a market collapse far ahead of Jan. 2016 collapse. Failed Patterns are indeed provide great opportunities and traders should pay close attention to them.

Tools
1. Auto ABC
2. Head and Shoulders
3. Super Bars
Recent Posts
  • Trading Symmetric Triangle Patterns
  • Trading Cup and Handle Patterns
  • Trading Megaphone Patterns
  • How to trade your Dragon
  • Trading ABC Patterns
  • Parabolic Arc: What Goes Up...
  • Trading Large Gaps
  • Trading Parabolic Arcs
  • Behavioral Biases
  • Trading Chart Patterns Prematurely
  • Developing SPX Cup and Handle Pattern
  • Trading Patterns with Market Context and EquiVolumeTrend
  • Trading Patterns with Market Structures
  • Trading Failed Chart Patterns - H&S
  • Happy New Year 2016
  • Trading Phases using CMI
  • Volatility Zones
  • Trade Tools and Support Tools
  • Trading Confluence of Chart Patterns
  • Trading ABC Patterns with Options
  • Categories
  • 2B Patterns
  • ABC Bullish
  • ABC Bearish
  • Books
  • CMI
  • Double Bottom
  • Double Top
  • Dragons
  • Elliott Waves
  • Failed Chart Patterns
  • Fib. Bands
  • Fib. Zone Pivots
  • Fibonacci Levels
  • Floor Pivots
  • Gartley/Butterfly
  • Globex Pivots
  • Head and Shoulders
  • Inv. Head and Shoulders
  • Market Structures
  • MegaPhone
  • Multiple Tops
  • Multiple Bottoms
  • Options
  • Parabolic Arc
  • Pivots
  • Price Profile
  • Seminars
  • Strageies
  • SuperBars
  • Triangles
  • Trading
  • Psychology
  • Videos
  • Volatility Zones
  • VWAP
  • Wolfe Waves
  • X5 Patterns
  • Archives
  • Nov. 2015
  • Oct. 2015
  • Before 2015