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Head and Shoulders Patterns

Head and Shoulders Pattern on #VZ

Head and Shoulders Pattern on #VZ

Head and shoulders pattern on #VZ it’s a very good example of a head and shoulders top pattern. And, it has everything it needs to be taken serious and analysed. Let’s take a closer look.

The premise

Let’s start with the context. Therefore, let’s take a look at the weekly chart of #VZ (Verizon Communications Inc.). So, we can easily see that there is a wider rising wedge pattern in an uptrend. Here you can read more about what this means: Rising Wedge Pattern on #PG. Also, we can see that we have a SHS pattern in resistance. So, this is the pattern we’re interested in.

head-and-shoulders-on-vz-weekly-chart
Head and shoulders on #VZ weekly chart

Particularities of the head and shoulders pattern on #VZ

The first thing I want to say is that a reliable head and shoulders top pattern needs a perfect symmetry. Now, as you might expect, there are some differences between theory and practice. There are head and shoulders patterns which has a left shoulder made from two swings. As you might expect, we can watch for the right shoulder to be formed also from two swings. Remember, this is the perfect situation. Now, in our case, we have a left shoulder made from two swings. And, our right shoulder is of a thin variety.

What possibilities do we have to trade this SHS pattern

So, we have at least two possibilities here. The first is that the market is going to be very bearish and we might not see the second swing of the right shoulder before the drop. The second might be that we’ll see a perfect symmetry. Of course there are also another possibilities but we are not interested in them at this point.

How did I trade the head and shoulders on #VZ

After I decided to trade this pattern, I placed the sell stop order just under the January 14th 2020 daily candle low. And, my order is activated on January 30th. My order is activated at the beginning of the trading day and by the end of the day the price went only against me. So, I did nothing but wait. There is nothing unusual for the price to go against my position in the first two ore three days after the activation. The next day the price retested the previous high and reversed back at the opening price. The third day the price broke the neckline. So, at this time, we can see a complete pattern without the second swing of the right shoulder.

The outcome

As you can see, after the breakout, the market decided to retest again the previous high. And, by doing that, it also closed my trade with a loss. Because I lowered my stop just after the breakout I managed to take only a loss of a half of my initial risk. As a result, the good part is that we also have the second swing of the right shoulder. So, another confirmation of the bearish implications of our pattern. But, the bad part here is that I didn’t placed another sell stop order under the low of the false breakout. That’s because I expected a longer consolidation after the second swing of the right shoulder. After the breakout of the flag that appeared after the false breakout, the price reached its target in a matter of two or three days. But, I wasn’t in the market to profit from it.

the-outcome-of-the-head-and-shoulders-on-vz-daily-chart
The outcome of the head and shoulders on #VZ daily chart

The conclusion

One of the most important conclusions from this trade is that the timing is the most important component alongside the direction. And, as I already said in my previous articles the direction without timing means nothing. And timing without direction means the same. Another important conclusion is that the market can do anything and one must be ready for any situation. In this case I only took a small loss. And I’m ok with that. Though, this was a debatable situation. The flag was indeed of a thin variety. So, I’m ok with this outcome and all I have to do now is to move on to the next trade. After all, I don’t have to stick with only one instrument and look for revenge. The revenge trading is one of the most important causes of unsuccessful trading.

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