Today's discussion is a practice of pure price action only for technical Retail Traders, which is your trading group. Let’s see how you do.
If a group of professional technical analysts gather in a room together, they may agree on the broad view of an index, but the finer details seen bring out the individuality of the analyst. Each technical expert is going to view the chart somewhat differently establish different trends, support, and interpret the action that is yet to come with varying results.
This is due to the interpretation of what constitutes an established, popular chart pattern.
Take for example the S&P500 chart below. Clearly and all professional technical analysts would agree, this index is in a correction. The debate comes in whether this is a true Head and Shoulders Top or not, and if it is a H&S then how each analyst interprets critical aspects of this pattern to determine where the index would halt its downtrend and find support, is where the variations of interpretation would occur.
Above is a daily chart for the S&P 500 without any aids such as volume or other indicators. This chart is for practicing a pure price analysis for Retail Traders. Take a moment now before continuing this lesson to draw in your own lines for the top, determine what kind of top this is, and how far the index will drop before commencing a bottom.
Many technical analysts use a variety of assumptions for the interpretation of this topping formation. Some would immediately assume the Head and Shoulders Top. The neckline would create many disagreements and 3 different locations could be debated. This is the critical aspect of the H&S top, IF this is a true top. You must decide in this lesson if it is a true top or not. Next week I will give you the answer.
Based on the assumed neckline there are several dramatically different scenarios as to how far this correction could go, assuming the H&S top calculations. One analyst may choose to use the highest high, another could choose to use the closing price of the highest high price, still another might use the open and eliminate the inside day action. This alters the calculations for the depth of the correction.
Then the neckline which can be considered at 3 different levels, makes a huge difference in where the analyst would find the bottom of the correction. The amount of the correction is vastly different based upon where the technical calculations are for the top and the neckline. This is the traditional method of calculating how far the correction will be for this index.
Your task is to study the chart. Is this a true H&S or is something wrong with the pattern? Where is the traditional peak value for determining the first value of the correction? Where is the true neckline?
We will continue this training next week.
Many times if you do a lot of internet reading, you will find a wide discrepancy between what each professional analyst is saying for a correction, topping, or bottoming action. This is due to the nature of charts, price, value, and trend action.
Learning to read charts properly, and to correctly identify tops and bottoms is crucial to your success in trading. These patterns appear easy to interpret but they are not. There are rules involved and structures to study closely. Which price is the best to establish the peak high and the neckline?
Good luck, more next week.
Trade wisely,
Martha Stokes, C.M.T.
For more information email: info@technitrader.com
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
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