How To Trade Head And Shoulders Chart Pattern
This Head and Shoulders chart pattern real-life example was originally published on August 18 of 2011. At the time I used the rules of this chart pattern to predict when to get back into the market after the S&P suffered a 15% drop. This article was updated on March 12, 2023 with results. Here is the original post from August 18 of 2011.
The S&P recently displayed a classic Head and Shoulder chart pattern that we can use to determine a bottom to the markets recent decline.
In the graph below you’ll notice the head and shoulder with a neckline (support level of the two shoulders) at 1250 on the S&P. Once the S&P crashes through the neckline, then the Head and Shoulders is officially formed. Before that, it could rise and create a different pattern.
To figure the bottom, you normally take the height of the pattern (from neckline to top of the head) and subtract that amount from the neckline to get the bottom.
Since the neckline is at 1250 and the top of the head is at 1370, that gives us a height of 120 points. So taking the neckline at 1250 and subtracting 120 will give us a bottom at 1130.
The S&P has played with this area on several occasions recently. Check out these days and the S&P lows on those days:
August 8, 2011: 1119
August 9, 2011: 1101 (the day I claimed we had bottomed)
August 10, 2011: 1118
August 11, 2011: 1121
August 18, 2011: 1131
The S&P has been bouncing around a low of 1120 on average and today (August 18) it hit a low of 1131. If the S&P hits around 1120 again, that may be a good time to start getting greedy and doing some buying.
UPDATE March 12, 2023: I was going through old posts and came upon this one. I thought I would give an update as to what actually happened after my above prediction.
The recommendation on August 18 of 2011 was to BUY should the S&P drop to 1120. That happened on October 3rd of 2011, roughly six weeks after the prediction. The S&P closed at 1099.23. It never closed lower after that.
I’m a big fan of leveraged index ETF’s. To profit off upside moves I use TNA with my Index Trading System. Instead of buying stocks on October 3 of 2011 when my target was hit on the S&P, one could buy TNA. Within one month, TNA was up 100%. Just two years later on October 18 of 2013, TNA was up 500!!. That’s how you profit off chart patterns like the classic Head and Shoulders chart pattern.
