Estimated Risk
The trend line connecting the head and the right shoulder is called a “fail-safe line.” Depending on the shape of the formation, either the neckline or the fail-safe line could be farther from the entry point. A protective stop-loss order should be placed just beyond the farther of the two trendlines, allowing for a minor retracement of prices without getting needlessly stopped out.
With a possible left shoulder formed at 387.75 on April 4 and the right shoulder formed on May 9 at 387.80. The head-and-shoulders top was set off on May 14 on a close below the neckline. However, prices broke through the fail-safe line connecting the head and the right shoulder on May 28, stopping out the short trade and negating the hypothesis of a
head-and-shoulders top.
DOUBLE TOPS AND BOTTOMS
A double top is formed by a pair of peaks at approximately the same price level. Further, prices must close below the low established between the two tops before a double top formation is activated. The retreat from the first peak to the valley is marked by light volume. Volume picks up on the ascent to the second peak but falls short of the volume accompanying the earlier ascent. Finally, we see a pickup in volume as prices decline for a second time. A double bottom is simply a double top turned upside down, with the foregoing rules, appropriately modified, equally applicable.
As a rule, a double top formation is an indication of bearishness, especially if the right half of the double top is lower than the left half. Similarly, a double bottom formation is bullish, particularly if the right half of the double bottom is higher than the left half. The market unsuccessfully attempted to test the previous peak (trough), signalling bearishness (bullishness).
