Some chart patterns only require a few data points to develop and, therefore, they are actually quite common. A good example is the Shooting Star candle pattern. We need only an initial uptrend followed by the Shooting Star candle itself and finally the confirmation day after the Shooting Star. It’s possible to see all that develop with as few as a dozen candles.
On the other hand, there are patterns that develop over a much longer time frame and, consequently, don’t show up as often. The Head-and-Shoulders reversal is such a pattern. Since it’s comprised of essentially three uptrend/downtrend combinations, we need to look for it over a longer time horizon. Traders can see this pattern taking shape now in the weekly chart of the QQQs.
Notice how the chart shows the QQQs in a sideways channel through most of 2011. Toward the end of the year, the price started to move into a new uptrend. This is where the Head-and-Shoulders starts to take shape. At this point, we can’t recognize it as anything more than an uptrend. We begin with the first shoulder. This developed between February and May 2012 with the peak around the beginning of April. Next we see the head, which took shape from May through November 2012. Notice how the top of the “head” is a higher high, occurring around the middle of September.
This brings us to where we are now. The second shoulder appears to be currently forming in the weekly view, with this week’s high lower than the head but approximately even with the first shoulder. Taken together, you can see the shape of the head and both shoulders – with a little imagination, of course.
For this chart pattern, you need to watch for price to drop below the neckline – right around $61. A strong weekly close below the neckline would be the completion of this bearish reversal pattern. Don’t jump the gun, though! Sometimes, the price drops to the neckline and bounces up – forming a channel rather than a new downtrend. But for now – lets watch it and see what happens! Looking at real charts in real time is the best way to learn applied technical analysis.