SGX Stock Charts

According to Bulkowski, "if you can determine that a head and shoulders formation is completing, consider buying the stock. The formation rarely disappoints and the rise is worth betting on."11 He does continue, however, to caution potential investors to first be sure that what they are looking at is a true head and shoulders bottom. If you're unsure, he advises, wait for the breakout at the neckline.

Schabacker advises patience when monitoring the development of this pattern. He bases this on the fact that a head and shoulders bottom tends to take longer to form and is smaller in size to a head and shoulders top. Don't expect the time frames for pattern development to mimic that of the head and shoulders top.12 Murphy suggests the investor use this difference to his or her advantage. Because of the smaller price ranges and slower development time, "it is usually easier and less costly to identify and trade bottoms than to catch market tops."13 Although, he concludes, because prices tend to decline faster than they go up, an investor can reap greater rewards trading a head and shoulders top. This greater reward is accompanied by greater risk.

Murphy is adamant that increasing volume is a critical confirming pattern in the completion of a head and shoulders bottom. "If the volume pattern does not show a significant increase during the upside price breakout, the entire pattern should be questioned." 14

Bulkowski advises investors that if they miss the upside breakout, they should wait and watch. They may not have lost a trading opportunity. "Half the time, the stock will throw back to the neckline. Once it does, buy the stock or add to your position." 15

Edwards and Magee call a close above the neckline break of approximately 3% of the stock's market price the "breakout" or "confirmation" of the head and shoulders bottom.16

http://www.recognia.com/reference/patterndescr_hsb.htm