How to identify a valid SHS pattern using PNF chart with volume indicator

How to identify a valid SHS pattern using PNF chart with volume indicator

Example from the EURJPY market. I use the recent SHS (head and shoulders pattern) to demonstrates some not-so-difficult concepts that will give you the great help to distinguish a fake SHS pattern from real.

I like to use PNF because they are able to reduce “noise” as well as divide markets into up and down waves (rough but acceptable).

This SHS pattern (I’ve outlined it with green triangles and S1-H-S2 marks) made a top for the small uptrend initiated by the down-move [1] (uptrends always initiated by the down-move, while downtrends always initiated by the up-move). I’ve outlined this minor uptrend with 3 blue upward lines.

Now let’s study exactly the SHS pattern.

  • 2] Extremely high volume. I tend to interpret extremely high-volume moves as potential hidden weakness signs.
  • 3] Immediately after column [2] we got the effort of bears. Note, this is the biggest volume on among many previous red columns. This effort pushed the price back down to the levels where impulse [2] was started. The big red volume represents the bearish warning by itself, but combined with notable effect – chart reader becomes informed about supply is heavy around S1 high.
  • 4] Another attempt. Price penetrated the S1 high, but just a bit and very quickly did back down to the start-level of the impulse. Another bearish behavior.
    I call these triangles as the Shape-of-Weakness (Abnormal green vertical spike with further smooth decline which erases all progress of the vertical impulse).
  • 5] This is the start of a new bullish attempt. Price bounced from the central-line of the up-trend channel. But this rally was quickly hit by…
  • 6] …high volume supply-column. 
  • The SHS pattern is formed. Taking into account the described story – bears have the odds. This SHS increases its potential to turn into the down-trend move.
  • 7] The central line of the upward channel is broken. Almost the End for bulls. No chances for bulls to use the support from the center-line of the up-trend channel.
  • 8] Bottom-line of the uptrend channel also broken by this supply-column. The market switched into the down-trend mode.

Where to open shorts?

IMO, stages from [decline-after-4] to [8] have enough argumentation to open short positions.

How to increase the confidence in opening shorts?

Firstly, note the SHS formed at round number 121.00. So, this psychological level revealed its bearish influence.

Secondly, we have a major decline in the background (not shown on this chart). So, selling activity is matching the big picture context (the way to increase success probability).

Hope this study was helpful for you.

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