Trading continuation patterns in the direction of the trend offer the best odds, but what do you do when that trend comes to an end?
There is an old saying in the market: when the market fails to make a higher high, it will make a lower low. The head and shoulders pattern is exactly that.
At first, the market makes a pullback as expected, but then it pulls back further than expected after making a new high on the second rotation. Finally, the move higher fails to make a higher high as the move up falters. Traders and investors see that the new high did not have the explosive energy to take it to another new high, and they get nervous and start to rush to the door. In trading, you don’t want to be the trader left holding the bag, so it’s best to get out before the crowds. This sets up what’s called the neckline break. The low from the first pullback lines up with the low of the second pullback, which establishes the neckline. The neckline is an area of major support, which just means bottom-to-bottom support. When that support level is broken, all hopes of the uptrend resuming are dashed.
A possible Head and Shoulders pattern developing in the SPY, late 2024/early 2025.
After the neckline break, you usually get a quick rally back to the neckline break area, which then leads to a subsequent secondary sell-off.
In some cases, usually after some kind of sideways pattern, the uptrend can resume itself, but it is far lower odds.
