Too often I see commentators talk head and shoulder (or reverse head and shoulder) while in my view the chart does not reflect that pattern. Now, I may just be too much of a stickler for patterns but my criteria for an H&S pattern go something like this:
Consider a person standing with his hands dangling down. Now, cut off the body at the arm pit level (forget the blood and gore). What you have left is an arm on the left side going up, a shoulder, a head, another shoulder and then finally an arm on the right side going down. That is a visual representation of a head and shoulder chart pattern. MOST IMPORTANT, for an H&S pattern the lead in must be a bull market up trend. The neckline is defined as a support line drawn from the low point of the left shoulder through the low point of the right shoulder. Only after the breaking of this neckline AFTER the completion of the right shoulder do we have a valid H&S pattern. Up to that point the pattern can only be described as a POTENTIAL H&S pattern. The distance from the neckline to the top of the head is then subtracted from the level of the neckline break to give us a projection of the down move.
Many analysts (and most text books) like to see the volume action decrease at the head and decrease further at the right shoulder versus the volume peak at the left shoulder. I find this too often in error. A strong bull market leading to a top (head) very often has increased volume almost right up to the head just before or during the top.
I do have two additional criteria to define an H&S pattern. First, the distance from the start of the bull trend to the top of the head must be AT LEAST two times the distance from the head to the neckline. Secondly, the momentum indicator (I prefer the 50 day RSI) must show a negative divergence at the head location versus the left shoulder location.
This is my personal definition of a head and shoulder pattern and you can use it or not, at your discretion. A reverse head and shoulder pattern is just upside down to the description of the H&S above, with a bear market lead-in to the left shoulder.http://www.marketoracle.co.uk/Article24454.html