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A Neckline Doesn’t Make It A Head And Shoulders

ByDragonfly Capital
AuthorGregory W. Harmon
Published 10/04/2012, 05:42 AM
Updated 05/14/2017, 06:45 AM

Just because you can draw a neckline doesn’t mean it is a Head and Shoulders Pattern. Many are asking if this chart below of iShares Barclays 20+ Year Treasury Bond Fund (TLT) is a Head and Shoulders top. There is a neckline and a right and left shoulder with a head, but there are some things about this that are problematic.

First the neckline has a pretty steep slope to it. We can get over that if it was the only issue. But the two Shoulders are also very different in size with the left being about 5 and the right at 8 is much closer to the size of the head at 10. Perhaps if it falls back to the neckline again it could be a two headed Head and Shoulders Pattern.

iShares Barclays 20+ Year Treasury Bond Fund (TLT)
TLT
Finally I would like to see the volume declining from the left shoulder through to the right shoulder. This is subtle, but becomes troublesome with the run up in volume on the last touch if we now want to convert it to a two headed Head and Shoulders Top.

So if it is not a strict head and Shoulders Top does that mean it is not bearish? No! I see a falling wedge in this chart as below. With the last touch at the top of the wedge it can either turn lower or push through. Right now it looks to head lower from the supporting cast of indicators.

iShares Barclays 20+ Year Treasury Bond Fund (TLT)
TLT 2
The 50 day Simple Moving Average (SMA) is rolling lower and crossing through the 100 day SMA. These crosses can be a catalyst for movement. The Relative Strength Index (RSI) has stalled at a lower high and is moving sideways. The Moving Average Convergence Divergence indicator (MACD) has been trending higher since September 17th but is now flat. These give a bias to the bottom of the wedge.

Note: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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