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Head and Shoulders Pattern and Inverse: How to identify it with channels

Head and Shoulders Pattern: A Head and Shoulders reversal pattern forms after an uptrend, and its completion marks a trend reversal. The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows (Pivots) of each peak can be connected to form support, or a neckline. The Neckline does not have to be a perfect parallel line and in most cases I see that a slight rising neckline adds to the momentum on the breakdown.

Understanding channels and wedges will really help out in identifying valid H&S reversals and with that said my key criteria to trading this as a top it to see the channel/price divergence show up in a “recognizable channel” remember a channel/price divergence is when the stochastics and price maintain a harmonious trend. The stock price makes and new high and the stochastics make corresponding high. When this relationship starts to fall a part or “diverge” You will be looking for a the Stochastics to get overbought but the price to be under the previous high.

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