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Chapter 8 —Head and Shoulders: An Old-School Approach
When prices penetrate the Neckline, a change in trend is believed to have occurred, at which point it’s possible
to apply the Head and Shoulders Measuring Formula. To identify a high probability price target for the move
following the break of the Neckline, measure the distance between the Head and the Neckline and then project
that distance down from the point at which the Right Shoulder breaks the Neckline. Notice how effective this
technique was in identifying the early November low in Feeder Cattle at 107.00 (Figure 76).
Figure 76
Fitting Head and Shoulders into Wave Analysis
So how does this traditional chart pattern fit into the Wave Principle? Quite easily. Just imagine that the Left
Shoulder represents the extreme of a third wave, and its subsequent correction, wave four. Wave five is the
Head, and the selloff following the push to new price extremes is either wave A or wave one. The Right Shoulder
fits into our basic building block of the Wave Principle by representing a B wave advance or second wave,
followed by a wave C or wave three decline, which of course penetrates the Neckline.
The Ultimate Technical Analysis Handbook — © 2009 Elliott Wave International
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