Head and Shoulders Top
This pattern is the mirror image of the Head and Shoulder Bottom; it is formed with a peak followed by a pullback, then a higher peak that then retreats back to the same support as the prior decline, finally followed by another lower peak that eventually rolls over and breaks the neckline support.
Here is a look back at the weekly bar SP500 in mid 2011. As you can see after the large rally in the end of 2010 the Market formed this nasty topping pattern and subsequently broke down hard and fast, dropping some 120 points. The measured move process is exactly the same as with the Inverse Head and Shoulders pattern; take the highs of the head minus the neckline support, then add that difference to the neckline break and that gives you your downside target.
There are not many Head/Shoulder Tops being seen in the markets right now on any intermediate to long term charts to show as current examples (which is a good thing for near term market strength), but believe me, we will certainly get our share of them some time in the not too distant future.
All I could come up with was a short term view of Caterpillar (CAT) which seems to be putting in a bit of a top here. Now, the time frame that you observe a pattern in is very important. Short term (30 minute bar chart or less) simply signals a small pullback. That small pattern could begin to set up a larger pattern in the future, but we deal with that as it comes.
Here I just think we are seeing a needed pullback in the stock and is nothing of major concern, I just simply wouldn't be too eager to jump into CAT at these levels. Something interesting to note in this chart is that if you look at each peak (both shoulders and the head), you can see that they all have similar mini Head/Shoulder patterns also. As we get further along in our research you will see how one pattern often begets another pattern and so forth. These 3 mini Head/Shoulders within the larger pattern lend more support to the larger pattern fulfilling its price target and show even more bearish trading activity taking place under the surface.
Double Top
The Double Top is a popular pattern for the media to talk about because it is easily observable and any time a stock is attempting to make a new high, the chart can look to be a "potential" Double Top; the media loves it because they can use it to sell their fear agenda to retail investors.
So just know that
Here is the ugly beast. Seeing this kind of action on a long-term chart like this (Weekly bars) spells trouble below. As we can see here following the peaks came a quite significant sell off; CHK lost more than half its value in the next year. This Double Top, measured from roughly $36 to $27, a $9 pattern projecting a target price of $18. That would have made a nice trade and it even ran further. Just as with a Double Bottom pattern, I like to see momentum weaken with the second peak; this shows a lack of conviction behind the rally attempt to new highs.
Watch list stock HD could be putting in a possible Double Top here:
As much as I would like this to not be the case, the market doesn't care about my plans. I've had to reduce my position and will wait for the target completion and trend support to add back shares.
You can see the weakening momentum here from the MACD. One thing to still be aware of is that we still have a nearly 2 year, very clean uptrend intact. So you can't let a pattern like this run you off just yet. As long as trend support can hold, we will continue to see higher highs and higher lows. If that changes however, we will have to change with it.
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