Executive Mentoring Program

Executive Mentoring
Lesson 6
Chart Patterns
Head and Shoulders
Double/Triple Tops and Bottoms
Ascending/Descending Triangles
Rising and Falling Wedge

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Head and Shoulders Pattern

Head
Shoulder Shoulder

Throwback

The head and shoulders pattern is a pattern of a weakening trend, and a trend reversal.
The right hand shoulder of the pattern creates a lower high. Once the stock breaks
through the neckline, the downward momentum usually accelerates. A throwback or a
retest provides another shorting opportunity.

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The head and shoulders can take place on any time interval. AMZN had a topping Head
and Shoulders pattern on a weekly chart, indicating a possible top.

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Upon further inspection we notice that the right hand shoulder of a Head and Shoulders
pattern is an ABC correction. This allows us to look for Fibonacci confluence and make
a trade entry at the right hand shoulder. Many other teachings on technical analysis
advise an entry at the break of the neckline. Our strategy allows us to get into the trade
much earlier.

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The bullish version of the head and shoulders is called the inverted head and shoulders
pattern. It is the exact same makeup upside down. We are still focusing on the correction
that is the right hand shoulder. CTX provides an excellent inverted head and shoulders,
with the retracement to the .564 and a projection to the .886.

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The bearish head and shoulders on John Deere (D) gives a .786 retracement and .886
projection for a confluence level that completes the ABC correction and resumes the
downtrend.

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Double and triple tops are often made a up of parts of the ABC correction. In this
example the B leg has retraced to the .886 level and creates a double top. The next
uptrend after the ABC correction stalls at the 100% retracement, creating a triple top.

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Double bottoms are often a flat ABC correction, meaning that A and C are at the same
retracement level. Understanding this will help in analyzing a pattern further.

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At first glance it looks as if a triple bottom of the S&P 500 is at the same support line.
Triple bottoms can happen around a “range of price”, meaning an area or zone of support.
Fibonacci analysis will give more detail to this pattern.
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There are many examples of when stocks look like they are going to create a triple bottom
but come up short. Generally that's because the stock is finding support at either the .786
or .886 Fibonacci ratio, a retracement of the most recent rally.

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A monthly chart of the S&P 500 shows that this triple bottom takes place at a perfect
level of Fibonacci confluence with .685 retracement and a 1.128 projection.

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(TXT)
The ascending triangle is a bullish continuation pattern.

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Traditional technical analysis teaches how to make a trade at the break out of the
horizontal resistance level. Ascending triangles are generally made out of two separate
corrections, either correction provides a bullish trade before an ascending triangle actually
materializes.

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A profit target of this pattern can be used by taking the distance of the base of the triangle
and projecting that from the breakout point.

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(DCN)
The descending triangle is a bearish continuation pattern. A break of the support level
provides additional confirmation of a bearish trade. We are focusing on the correction of
the overall trend not the break of the support line. Many times we are able to make a trade
before this pattern materializes.

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Profit targets can be found by taking the distance of the base of the triangle and projecting
that from the breakdown point. In this case the stock falls much further than that level.

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(AHC)
Symmetrical triangles are again two different corrections. Unlike the ascending triangle
the intermittent rally between the corrections does not go back to the highest point and
creates a lower high. In this example it retraces to the .685 of the first correction.

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(IBM)
A rising wedge is a bearish pattern that usually completes at the top of the trend.

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(CTL)
This pattern can also be created by drawing trend lines on ABC correction and acts as a
continuation pattern.

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(NE)
The falling wedge is a bullish pattern that can be found at the bottom of a trend as well as
drawing trend lines on an ABC correction.

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Ideally the correction should be on lighter volume.

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Summary
Traditional technical patterns can now be viewed with Fibonacci analysis. The head and
shoulders pattern is a pattern of a weakening trend at the top with an acceleration of the
bearish trend off of the right hand shoulder, and an acceleration of the bullish trend with
the inverted head and shoulders. The ascending and descending triangles are continuation
patterns. Trades can be made at the breakout of a symmetrical triangle. Rising and
falling wedges can be topping and bottoming patterns, as well as continuation patterns.

Assignments
Look for any of these patterns taking place within this group of stocks.

SPY,DIA,QQQQ,
IBM,EBAY,AMZN,
BA,WMT,INTC,
GOOG,JPM,KBH,
XOM,TGT,GS,
RIMM,FDX

Paper trade any patterns that you see. Be prepared to answer these questions on any two
of these stocks for the next class.

1. Is there either a head and shoulders or an inverted head and shoulders taking place?

2. Is the stock within a possible ascending or descending corrective triangle?

3. Is there a rising or a falling wedge pattern forming at the top or the bottom of the
current trend?

Review the recording for clarification and repetition.

Read and have an understanding of lesson 7

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