Ford Completes Head and Shoulders

Dec 4, 2007: 6:36 PM CST

Ford Motor Company (F) recently completed a compressed Head and Shoulders pattern that exceeded the price projection inherent in the pattern.

The Head and Shoulders pattern in Technical Analysis consists of an initial swing (left shoulder) that results in a second higher swing (head) and terminates with a failure swing (right shoulder) that takes price beneath the support zone known as the “neckline” which can be absolutely horizontal or slightly slanted.

Although this head and shoulders pattern in the Ford example is not a classic or textbook pattern because we normally expect these patterns to form AFTER a sustained uptrend, as these patterns are often of the major reversal type.

Let’s look:

The initial condition – left shoulder – completed mid-October and then price swung up to complete the ‘head’ section before creating a failure swing-up in early November.

Keep in mind that there is no way possible in technical analysis to forecast which price swings will complete themselves into head and shoulders patterns, and the pattern is absolutely undiscernable until the final failure swing around November 12th is completed.

It is at THIS POINT that you can enter a trade to take advantage of the pattern, its implications, and measuring rule (price target). The target is traditionally the same distance from the top of the head (top of the highest swing) back to the neckline, and from this projecting price by that same amount lower. I have highlighted these with green lines. Notice that the objective was not only achieved but exceeded.

Even though price continued lower, it was still better to play for a small target with this and most patterns in technical analysis, as the ‘window of opportunity’ or ‘forecast zone’ lasts for a very limited time.

For educational purposes, I have also highlighted a positive momentum divergence in August that preceded a large volatility move up which created the eventual head and shoulders pattern.

While no pattern is perfect, it helps to study as many patterns as possible to see how you interpret them and whether you feel comfortable incorporating them into your growing trading arsenal.

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