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I generally agree that h&s patterns are over-identified and are
generally under whelming in their reliability because they over
identified. The "h&s" in the spoo has been bandied about by analysts
ever since the spike high was put in in Mar00 bounded by roughly equal
lows just below 1350 cash. While a major decline in the spoo may indeed
be underway, I believe any h&s pattern which includes a right side
retracement of much more than 38% in the direction of the head, is prone
to failure. Certainly the oft cited h&s in the spoo with a 78%
retracement on the right side falls into that category.
There is, however, a variant of the h&s pattern which William O'Niell
(of IBD) called a cup and handle. This is a pattern I find regularly in
many markets in both standard and inverse form, and which I trade with
great regularity using all time frames from 1 minute through daily. When
identified and traded properly, this pattern has a very high reliability
and even the failures can lead to profitable trades.
Looking at attached 5 minute futures, we begin with the most recent low
and look to the higher pivot low to the left and the higher pivot high
which lies to the right of the higher pivot low. These two pivots
(horizontal blue lines) are the anchors for the trade. If price can a)
run through the pivot high (the rim of the cup) before doing a
significant retracement (the handle) and b) the retracement is then
contained above the left pivot low (and generally no more than 25-38%),
we have the setup for a profitable trade which can be entered during the
retracement with stop at the left pivot low or for those who prefer to
buy breakouts, on the breakout.
Expected behavior is a breakout above the previous high for a run of
62-100% of the cup depth above the rim. I have, in days past posted
several examples of such trades in real-time. Using a c&h found a bit
lower in the 1 minute spoo, a good dozen points was taken out of this
rally with only a few points risk. There were some irregularities to
that c&h which can be identified and traded successfully with study and
practice.
Unexpected behavior is a failed breakout which is seen in this example.
When the rally from the bottom of the handle failed and then rolled over
going through the bottom of the handle, it was a excellent clue that a
major decline would follow. In fact, there is an irregular inverse c&h
to be found in the failure just before it performed its final swan dive
through the lower blue line.
Earl
----- Original Message -----
From: "DH" <catapult@xxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxx>
Sent: Wednesday, October 11, 2000 1:01 PM
Subject: Re: [RT] Spoo and Boo tracking
> I'm not a big fan of H&S patterns but my understanding is that the
> pattern is not valid until the neckline is penetrated and the
> penetration holds. To talk about H&S before then is premature as one
can
> find 'almost' H&S patterns all over the chart. Somebody who actually
> trades these things please correct me if I'm wrong.
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