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Hi Dimitris,
Thursday, November 20, 2003, 5:50:17 PM, you wrote:
DT> It is interesting to watch the false readings.
DT> BA fulfills any H S requirement, even the Volume expansion
DT> at the touch with the neck line.
A few things about this I would say:
1) Although the books accept H&S with slanting necklines, I almost
never pay attention to them. I like almost flat necklines. The
flatter the better.
2) The right shoulder is slightly higher than the left shoulder.
That's a no-no for me. It should be no higher than, and ideally just
a touch lower than, the left shoulder. (Yes, I'm picky.) ^^_^^
3) A touch of the neckline is a touch of a *support* line. While a
H&S is generally a bearish formation, it is not really bearish until
you get a clean, confirmed break of that neckline. This one has no
clean break. I would say a clean break is at least one bar with the
high lower than the neckline. Until that happens, it's a support
line, even in a rather bearish formation. Penetration is NOT
guaranteed by the formation itself. Maybe people misunderstand this,
and that's why so many claim the formation is worthless. Any
formation is worthless if you don't play by the rules. ^_-
4) Something just isn't very "H&S-ish" about this formation to me. As
soon as I saw 'BA' in your note, I went to my own charts without
looking at your gif. I wasn't *exactly* sure where the H&S was
without a fair amount of staring and guessing. I'd have never seen
it; so I would have never considered it such. It's got to stand out
like a sore thumb to me.
And on the one's that stand out, the most common ways to play them
successfully (if there is such a thing as a common way to play what I
consider a rather uncommon formation), is not to short immediately on
a break of the neckline. That is similar to going long immediately on
a breakout to a new high -- sometimes it works, but your risk is
greater. Instead, wait for a drop, and then a pullback to that
neckline, then short in that area immediately when price turns down
again. You should have some help with your short there, because longs
who counted on the neckline as support will often be looking to "get
out even" on that first bounce back to it. They may hold if the
bounce goes over the neckline a bit, but the first bar going the
other way will knock them out of the trees like an autumn wind.
(One of the great keys to successful swing trading -- especially
short trading -- is figuring out how many got in how much trouble
exactly where. This is what made the ^225 H&S "predictable" before
it fully formed, IMO.)
Right now, basis the ^225, the best short area would be around 10,200
if price returned there and showed failure. There just isn't any
percentage shorting here in what is still a bull market (or one
whopper of a correction in a bear market) ^_^. But this discipline is
why I missed the big drop this week. Last Friday's close here was not
pretty, but it was still no violation of that neckline. Monday we
gapped a mile below it of course. You just are never going to get
all of these to play like a textbook example, of course, and you can
lose potential profit even by playing them right. ^_^ I lost
potential windfall by covering shorts on last Tuesday's plunge (the
11th). But that was a plunge TO the neckline, and that was a support
area, and indeed it bounced there. It was the right play. And I'm
still comfortable with my decision on Friday not to re-short. I'm
crying, but I'm comfortable about the pass. ^_^ If I made one
really bad move this week it was probably not shorting on Monday's
open. But I really hate to chase opens, especially here, where
professionals dearly love to fade emotional opens in either
direction. But Monday there was no fade -- it just dropped like a
rock. C'est la vie.
My discipline on 'falling knives' also cost me a nearly 5 percent
gain on Canon today. But not entering yesterday was the right thing
to do in my opinion. Another chance will come; they always do.
Yuki
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