I've posted a few times in the past week highlighting just how bearish BTC is looking. And now, Bitcoin is in the process of producing yet another head and shoulders that may result in some fireworks for the New Year.
Things to note
There is a rising wedge into the left shoulder
RSI is moving into oversold territory
The volume is consistent with a H&S
The height of the neckline to head would bring us to a previous support/resistance level
Things that would confirm the H&S
Increasing volume as the sell off builds momentum
Breaking the neckline at about 11.8k
Once the neck line is broken, retesting and subsequently being rejected by 11.8k
Things that would invalidate the H&S
Price breaking up through the 14.5k - 15k resistance
Price moving beyond the top of the head at about 17k
Targets
Our first target would be around the 10k mark as it has historical resistance/support
Our final target is about the 7k mark, which more or less lines up with the other bear patterns/projections we have seen
Remember, this is bitcoin and historically it has done whatever it wants, so this isn't a lock, but it is still looking very ominous!
Komen
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I forgot to mention the circle at the top of the wedge; this is an area we have to pay very close attention to, as this could be the top of the right shoulder (and of course the rising wedge). It is a pivot point for BTC and will define if we head lower, or move higher.
Komen
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As @EtherSwinger posted, rightly, in the comments, this isn't a head and shoulders because it is not coming from an uptrend; something so obvious, but something I completely overlooked!
I think we have to abandon this idea and move onto the next .... ;)
H&S is a reversal trend. You need to have bull coming into the L shoulder first. This is not a H&S based on your chart
crimsonronin
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@EtherSwinger, Ah thank you! You are completely correct. This is why I post: to be shown the obvious things I have overlooked.
themomentum
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Read the volume part there is no sellers volume at the moment trading is dead
Kazuhoko
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Hello,
What do you think of the current state ? Do you still think it's gonna dip ? Sorry, I have only little knowledge on TA, so trying to understand. :)
Allistercointrader
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It seems that price head lower the pivot point at this moment. Your ideal count at this stage. Let's see later on....
themomentum
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So we need heavy selling will watch it
crimsonronin
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@themomentum, the example is almost identical to what happened, and, as I said, we need to look for an increase in volume:
themomentum
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@crimsonr, OK said nothing XD
crimsonronin
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@themomentum, you could be absolutely right! Tthe bigger H&S BTC formed showed this pattern too, but didn't fully complete... we just wait and see if there is increasing volume as price declines, then if it breaks below the neckline.
themomentum
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Analyzing Chart Patterns: Head And Shoulders
By Investopedia Staff
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Analyzing Chart Patterns: Introduction
Analyzing Chart Patterns: Why Charts?
Analyzing Chart Patterns: Head And Shoulders
Analyzing Chart Patterns: Cup And Handle
Analyzing Chart Patterns: Double Top And Double Bottom
Analyzing Chart Patterns: Triangles
Analyzing Chart Patterns: Flags And Pennants
Analyzing Chart Patterns: The Wedge
Analyzing Chart Patterns: Gaps
Analyzing Chart Patterns: Triple Tops And Bottoms
Analyzing Chart Patterns: Round Bottoms
Analyzing Chart Patterns: Conclusion
The head-and-shoulders pattern is one of the most popular and reliable chart patterns in technical analysis. And as one might imagine from the name, the pattern looks like a head with two shoulders.
Head and shoulders is a reversal pattern that, when formed, signals the security is likely to move against the previous trend. There are two versions of the head-and-shoulders pattern. The head-and-shoulders top is a signal that a security's price is set to fall, once the pattern is complete, and is usually formed at the peak of an upward trend. The second version, the head-and-shoulders bottom (also known as inverse head and shoulders), signals that a security's price is set to rise and usually forms during a downward trend.
Both of these head and shoulders have a similar construction in that there are four main parts to the head-and-shoulder chart pattern: two shoulders, a head and a neckline. The patterns are confirmed when the neckline is broken, after the formation of the second shoulder.
Figure 1: Head-and-shoulders pattern
The head and shoulders are sets of peaks and troughs. The neckline is a level of support or resistance. The head and shoulders pattern is based on Dow Theory's peak-and-trough analysis. An upward trend, for example, is seen as a period of successive rising peaks and rising troughs. A downward trend, on the other hand, is a period of falling peaks and troughs. The head-and-shoulders pattern illustrates a weakening in a trend where there is deterioration in the peaks and troughs.
Head and Shoulders Top
Again, the head-and-shoulders top signals to chart users that a security's price is likely to make a downward move, especially after it breaks below the neckline of the pattern. Due to this pattern forming mostly at the peaks of upward trends, it is considered to be a trend-reversal pattern, as the security heads down after the pattern's completion.
This pattern has four main steps for it to complete itself and signal the reversal. The first step is the formation of the left shoulder, which is formed when the security reaches a new high and retraces to a new low. The second step is the formation of the head, which occurs when the security reaches a higher high, then retraces back near the low formed in the left shoulder. The third step is the formation of the right shoulder, which is formed with a high that is lower than the high formed in the head but is again followed by a retracement back to the low of the left shoulder. The pattern is complete once the price falls below the neckline, which is a support line formed at the level of the lows reached at each of the three retracements mentioned above.
Inverse Head and Shoulders (Head-and-Shoulders Bottom)
The inverse head-and-shoulders pattern is the exact opposite of the head-and-shoulders top, as it signals that the security is set to make an upward move. Often coming at the end of a downtrend, the inverse head and shoulders is considered to be a reversal pattern, as the security typically heads higher after the completion of the pattern.
Figure 2: Inverse head-and-shoulders pattern
Again, there are four steps to this pattern, starting with the formation of the left shoulder, which occurs when the price falls to a new low and rallies to a high. The formation of the head, which is the second step, occurs when the price moves to a low that is below the previous low, followed by a return to the previous high. This move back to the previous high creates the neckline for this chart pattern. The third step is the formation of the right shoulder, which sees a sell-off, but to a low that is higher than the previous one, followed by a return to the neckline. The pattern is complete when the price breaks above the neckline.
The Breaking of the Neckline and the Potential Return Move
As seen from the above, the head-and-shoulders pattern is complete when the neckline is broken; the trend is then considered reversed, and the security should be heading in a new direction. The point of breakout is when most traders following the pattern would enter the security.
However, the security will not always just continue in the direction suggested by the pattern after the breakout. For this reason it's important to be aware of what is known as a "throwback" move. This situation occurs when the price breaks through the neckline, setting a new high or low (depending on the pattern), followed by a retreat back to the neckline.
Figure 3: Throwback move illustration
This move back to the neckline is considered to be a test of the pattern and the newly reversed support or resistance. Remember that when a trend shifts (or a reversal pattern is confirmed), what was once support now become resistance, and vice versa. In the case of an inverse head-and-shoulders pattern (as shown in the chart above), the neckline represented a level of resistance for the security before it broke out. Upon the security moving above the neckline to confirm the pattern, the restrictive neckline becomes support for any move back up.
While it can be alarming to see a security move in the opposite direction of the trend suggested by the pattern, it isn't all that bad. The reason being that the successful test of this new level of support or resistance helps to strengthen the pattern and its suggested new direction. So, it's important to wait for the pattern to test out and not sell out too quickly - before the pattern makes its bigger moves.
Volume
In technical analysis and chart-pattern analysis, volume plays an important role as it is used as a secondary indicator. Volume indicates activity and money movement. When volume is high, there is a lot of activity and money changing hands - making it an important indicator to follow.
For the head-and-shoulders pattern, volume is used mainly at the point of breakout to help confirm the pattern. At this point, it's important that the breakout happens on a large-volume move. For a head-and-shoulders top, when the price breaks below the neckline (in a downward direction), it's best when this occurs during a large volume increase, which signals heavy selling. This strongly indicates that the underlying supply and demand in the market is moving in the same direction the chart pattern is predicting.
Volume can also be used as a secondary indicator during the formation of the pattern, well before the breakout, to gain an idea of the pattern's strength.
For a head-and-shoulders top, the left shoulder should show heavy volume as it hits its new peak. Low volume should take the left shoulder down to the neckline. The run towards the peak in the head should be on lighter volume compared to the peak formed in the left shoulder.
This should be a warning, as volume should move with trends - not against them. The peak formed in the right shoulder should be seen with even lighter volume than in either the head or the left shoulder. And again, the volume should be high when the neckline is broken, which is by far the most important area to watch in terms of volume. If the volume is lighter on the neckline break, the chances of the price moving back to the neckline after breaking is greater than if the neckline break was accompanied by large volume.
This interaction of volume and price movement in forming the reversal signal is not set in stone. However, it is the general tendency in the chart pattern.