Head and Shoulders Pattern with Market Context
Market Context is one of the most important concept traders should master before they start trading. Most traders have some concepts of Market Context… If price is above 50 EMA or 200-SMA and price is trading above Pivot or below Pivot etc. But solid understanding of Market Context makes traders confident in trades. Every trade I study and plan, I must clearly know what Market Context I am trading… I trade Price Patterns with Market Context. Market context validates, shows where entries and stops and where to place targets. If Market turns against the trade, I would even have a plan of where my theory fails.
Today afternoon around 1pm, I started seeing a Head and Shoulders Pattern develop in @ES. I started to notice CMI on 5m gave a sell signal about the same time. ES was trading around 1440. I started watching the market price action and wanted to trade below the Neckline of H&S at 1437. Another key element I noticed was today’s Opening Range and the First Hour Low was set at 1437.
This combination of level 1437 (Neckline, First Hour Low around Floor Pivot) gives me a strong H&S trade. I initiated a SHORT trade at 1437 with a STOP of 2.5 pts (1439.5). My Targets were set by measuing Head to Neckline. The fib. ratios of this length below Neckline sets my targets: 1431.5, 1430 and 1428.
About 30 minutes into my trade, ES traded below 1434 and reversed its trend and traded above my Short price. I have 2.5 pts STOP at 1439.5. ES traded at 1438.25 but again it reversed in my Short direction. I knew this time I wanted to close at least part of it around 1434 (+3 pt). Then I kept my next target at 1431.5 and moved my STOP to 1437. (B/E).
By the end of day, my next target was hit at 1431.5 (+5.5 pts) . My previous target gained (+3 pts). I think H&S will work further down overnight and trade below my exits (1431.5).
Around 11.30 am, I started to notice a potential Head and Shoulders pattern formation with a Head (high) of 1434 and Neckline at 1429. Around 1.10 pm, I saw first sign of Volatility Expansion Bar (RED) in the second shoulder signaling potential bearish trend. This itself is NOT enough for me to trade. I need to check the Bartime and VLTY to confirm it is side-ways trend. I need BarTime Averge to below 150 seconds to trade. But I kinda did not notice ignroed BarTime (which was printing over 200 seconds for 1220 Tick bar), and Shorted the low of the VEXP bar at 1430. BarTime continued to tick above 150 seconds and in next 10 minutes it traded above 1431. I realized BarTime is going to drag my trade further and I exited with a loss of 1 point.
Note to myself: Must check BarTime and VLTY on every trade!!
The last post on Dec. 6th showing CVS ABC Pattern and its Feb. 35 Options. CVS is trading in ABC Bullish Pattern with a Long triggered at 30.70, targets: $35 (100%AB), $36-$38 (127%AB-162%AB) and stop at $29.40 (below C). On Dec. 6th Feb. 2011 $35 Call options were trading at 0.50c. On Dec. 22nd, CVS reached its 1st target of $35, and Feb. 35 Calls were traded at $1.40. The chart below shows CVS chart as of Dec. 23rd trading.
Head and Shoulder Failure Trade
Today ES (S&P Emini Futures) gapped up about 15 points and by the end of the day closed 25 points up. About 10.15am, ES was showing some signs of initial tiredness and potential pullback. Usually on big rally days, reversal patterns are distinct and occurs over a period of time. Between 9.40am to 10.15am, ES showed a small size Head and Shoulder pattern signaling potential reversal. The neckline was marked at 1199 and the high of the head is at 1203 and high of the right-shoulder is at 1201.25. ES initially traded below the neckline from 10.15am to 10.30am. Then it reversed its trend and started trading above the neckline. When price trades above the neckline, it is a first-sign of failure. The confirmation of Failure occurs when price trades above the second shoulder high. About 11.40am, ES traded above the second shoulder high signaling a confirmation of H&S failure setup. A Long trade was entered at 1201.5. Most pattern failures make powerful moves in the opposite direction. It was evident today as price closed above the Right Shoulder (1201.25) and started to trade a powerful move to 1204.75 (first Target of HS Failure). Target is set the same height as the head to the neckline from the Second Shoulder high. Second Target is at 162% and third target is at 200% of the height above the second shoulder high. Targets are marked on the chart to show how the trade progress.
$SPX reversed its uptrend from 50% level (1131) and today it is trading near its neckline (1041). The second-shoulder is very narrow as price action is quick and quite volatile. A breakdown occurs when 2-Bars with lower-low close below neckline. H&S targets based on the height of H&S pattern are set at 1000, 932 and 865 level. A reversal of H&S is not considered until price trades for 2-3 bars above Neckline with Higher-High Closes. In this case, I would look for close above 1100 level on the upside for a reversal. Until then it is H&S pattern. H&S Pattern failure occurs when price trades above the high of the second shoulder.
Today $SPX.x reached its 50% retracement level (1131) and reversed to close at 1113. This may be considered as a strong reversal day as price closed at the lower-end of its daily range. $SPX.x is also unable to close above the mid Fib. Band and may be signaling potential weakness. But a single day reversal does not change the trend. It may require few more days of lower-lows and higher-lows to confirm a reversal in the last week’s uptrend. I’ll monitor 1123-1124 (Mid Fib. Band level) for another upwards push. The right shoulder formation may come a clear reversal from 1131-1150 area.
After few negative bias days, $SPX may be attempting to rally to form potential H&S pattern. The last SwingHigh was on April 26th at 1219.8. The Fib. retracement levels of 50% is at 1131 and 62% is at 1152. The first hurdle to reach this level is 200-SMA at 1107. If SPX passes this level, it may reach 1130-1150 level easily. We’ll evaluate at that level to see if it is a second-shoulder. See the Volume in the second shoulder to get some hint of H&S pattern.