As of 11/20/2019
  Indus: 27,821 -112.93 -0.4%  
  Trans: 10,695 -152.59 -1.4%  
  Utils: 855 +6.70 +0.8%  
  Nasdaq: 8,527 -43.93 -0.5%  
  S&P 500: 3,108 -11.72 -0.4%  
YTD
 +19.3%  
 +16.6%  
 +19.9%  
 +28.5%  
 +24.0%  
  Targets    Overview: 11/14/2019  
  Up arrow28,200 or 27,100 by 12/01/2019
  Up arrow11,400 or 10,600 by 12/01/2019
  Up arrow870 or 800 by 12/01/2019
  Up arrow8,700 or 8,200 by 12/01/2019
  Up arrow3,200 or 3,025 by 12/01/2019
As of 11/20/2019
  Indus: 27,821 -112.93 -0.4%  
  Trans: 10,695 -152.59 -1.4%  
  Utils: 855 +6.70 +0.8%  
  Nasdaq: 8,527 -43.93 -0.5%  
  S&P 500: 3,108 -11.72 -0.4%  
YTD
 +19.3%  
 +16.6%  
 +19.9%  
 +28.5%  
 +24.0%  
  Targets    Overview: 11/14/2019  
  Up arrow28,200 or 27,100 by 12/01/2019
  Up arrow11,400 or 10,600 by 12/01/2019
  Up arrow870 or 800 by 12/01/2019
  Up arrow8,700 or 8,200 by 12/01/2019
  Up arrow3,200 or 3,025 by 12/01/2019

Bulkowski's Busted Head-and-Shoulders Top

 

Information on busted chart patterns is discussed in my book, Visual Guide to Chart PatternsVisual Guide to Chart Patterns book.. You can find information in the book in Chapter 22: "Busted Pattern Buy Setups" (starting on page 229) and in Chapter 25, "Busted Pattern Sell Signals" starting on page 271.

I show a picture of the book on the right.

If you click on the above link and then buy the book (or anything) while at Amazon.com, the referral will help support this site. Thanks.

-- Tom Bulkowski

$ $ $

Busted Head-and-Shoulders Top: Summary

Busted head-and-shoulders tops are head-and-shoulders tops in which price breaks out downward and drops less than 10%, turns around, and then closes above the top of the head-and-shoulders.

Busted head-and-shoulders tops (all varieties: single, double, and triple or more busted) see price gain an average of 31% (median 20%). Single busted patterns gain an average of 42% (35% median).

Busted Head-and-Shoulders Top: Single Bust

Picture of Headwaters (HW) on the daily scale.

Busted head-and-shoulders tops come in three varieties: single busts, double busts, and three or more busts.

Single busted head-and-shoulders tops look like the chart on the right, from Headwaters (HW), on the daily scale. Price forms a head-and-shoulders top which confirms as a valid head-and-shoulders when price closes below the chart pattern's neckline. That happens at A.

Price doesn't drop far before recovering and closing above the top of the chart pattern, at B. This busts the head-and-shoulders top.

Price continues rising more than 10% above the blue line, to C.

For a single bust, look for:

  1. Price must confirm the head-and-shoulders top by closing below the neckline (or right armpit if the neckline slopes downward, as in this case) of the head-and-shoulders top (that happens at A in this example).
  2. Price must drop less than 10% below the breakout price of the head-and-shoulders top.
  3. Price rises and closes above the top of the head-and-shoulders top (B).
  4. Price continues rising at least 10% (C).

The last point, 4, means the ultimate high must be at least 10% above the top of the head-and-shoulders top. If price fails to climb more than 10%, then it could be forming a double bust.

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Busted Head-and-Shoulders Top: Double Bust

Picture of Con-way (CNW) on the daily scale.

The chart of Con-way (CNW), pictured on the daily scale, shows an example of a double busted head-and-shoulders top.

Price forms a head-and-shoulders top chart pattern that confirms when price closes below the up-sloping neckline, at A.

Price does not drop far before it rises and closes above the top of the chart pattern, at B. This busts the head-and-shoulders top for the first time.

Price rises less than 10% above the top blue line (the top of the chart pattern) before tumbling to C. C is the next close below the bottom of the chart pattern. This busts the head-and-shoulders top a second time. Price then continues down at least 10% (D), completing the busted count at two.

For a double bust, look for these elements.

  1. Price must confirm the head-and-shoulders top by breaking out downward: closing below an ups-sloping neckline or armpit when the neckline slopes downward (A).
  2. Price must drop less than 10% as measured from the breakout price.
  3. Price rises and closes above the top of the head-and-shoulders top (this happens at B).
  4. Price fails to rise at least 10% above the highest peak in the head-and-shoulders top before reversing.
  5. Price closes below the lowest valley in the head-and-shoulders top a second time (point C).
  6. Price drops more than 10% below the bottom of the chart pattern (the drop toward D).

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Head-and-Shoulders Top: Triple Bust

Picture of Delpha Financial Group (DFG) on the daily scale.

Triple busts are rare, but the word triple is misleading. I counted every pattern that had three or more busts.

The chart of Delphi Financial Group (DFG) is an example of a multiple bust head-and-shoulders top.

The head-and-shoulders confirms when price closes below the neckline at A.

After that, price rebounds to B where it closes above the top of the chart pattern. That represents the first bust. Price rises less than 10% before tumbling to C, the next close below the bottom of the head-and-shoulders top.

Again, price drops less than 10% below the bottom blue line (signifying the lowest low in the chart pattern) before rising to D. D is the next close above the top of the chart pattern, busting it for the third time. If price rises more than 10% above the top of the chart pattern then the busted counting ends, otherwise it continues. I stopped counting at three for research purposes. Delphi busts a fourth time in this chart.

For a triple (or more) busted head-and-shoulders top, look for the following:

  1. Find a double busted pattern in which price, after the second bust, fails to drop more than 10% below the bottom of the head-and-shoulders top. That is point C in the figure.
  2. Price rises and closes above the top of the head-and-shoulders top (D).
  3. Price must rise at least 10% above the top blue line to stop the busted count at three. If not, then additional down and up cycles (each less than 10% from the nearest blue line) may continue, busting the head-and-shoulders top.

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Busted Head-and-Shoulders Top: Methodology for Testing

I found 2,125 head-and-shoulders tops or complex head-and-shoulders tops in 901 stocks dating back as far as July 1991 to October 2011. Few stocks covered the entire period. All of the head-and-shoulders tops I found manually either using a historical search or real time (looking at my stocks each day). The real time editions prevented any look ahead bias since I am not privy to future price movements.

I then used software to measure performance and flag busted chart patterns.

Gauging performance uses the same method as I used to catalog non-busted chart patterns. That is, the search for the new ultimate high or low proceeded as described in the glossary. Thus, the numbers reported in Results should be considered perfect trades.

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Busted Head-and-Shoulders Top: Test Results

The following numbers are the results from perfect trades in bull markets, unless otherwise noted. Do not expect actual trading results to match those discussed below. Use the numbers only for comparison purposes with other chart patterns.

How often do head-and-shoulders tops bust?

Of busted head-and-shoulders tops, what is the frequency distribution?

If you trade a busted head-and-shoulders top, there is a 70% probability that it will bust just once. Thus, 30% fail to show price rising by more than 10% above the top of the head-and-shoulders top.

What is the average rise for single busted head-and-shoulders tops? As measured from the top of the chart pattern to the ultimate high...

What is the rise from perfect trades after all busted head-and-shoulders tops?

What is the failure rate of all busted head-and-shoulders tops? The answer appears in the below table.

Busted Head-and-Shoulders Top: Failure Rate
Failure rate:  5%  10%  15%  20%  25%  30%  35%  50%  75%  >75% 
Number of head-and-shoulders tops:89645131252822695446
Percentage:19%13%11%6%5%6%5%14%11%10%
Cumulative:19%32%43%49%54%60%65%79%90%100%

For example, there were 89 busted head-and-shoulders tops that failed to show price rising at least 5% above the top of the head-and-shoulders top. Those represent 19% of all busted head-and-shoulders tops. On a cumulative basis (a running total), they also represent 19% of all busted head-and-shoulders tops.

The median rise of all busted head-and-shoulders tops is 20%. You can find that by interpolating the 20% and 25% columns. Thus, half of all busted head-and-shoulders tops will see price rise at least 20%, if traded perfectly.

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Busted Head-and-Shoulders Top: Trading

Picture of Church and Dwight (CHD) on the daily scale.

I show a chart of Church and Dwight (CHD) on the daily scale.

A head-and-shoulders top confirms when price closes below the neckline at A. Price drops to B, which is less than 10% below the breakout price of the chart pattern, and then rises above the top of the chart pattern, at C. This busts the head-and-shoulders top.

To trade this busted chart pattern, place a buy order a penny above the head (the highest high in the chart pattern). That will get you into the stock automatically. The order fills at 36.25.

When you decide to sell is up to you. As I write this (October 27, 2011), the stock is near to making a new high at 45.52, for a potential gain of 26%.

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Busted Head-and-Shoulders Top: Additional Trading Tips

The sample count is small so I only offer two tips.

First, find where the trend starts. If the time between the trend start and the top of the left shoulder is more than the median 113 days, the price tends to rise 29% (230 samples) after busting the pattern (measured from the top of the head-and-shoulders). Those less than or equal to 113 days rise an average of 33% (233 samples).

Look for busted head-and-shoulder tops in which the trend start is less than or equal to 113 days.

Finally, if the trend start is below the top of the busted head-and-shoulders top (yes, the top), and the rise from the trend start to the top is more than 40%, the stocks gain an average of 34% (224 samples). Those less than or equal to the median 40% see price rise an average of 28% (224 samples).

Busted head-and-shoulder tops with the gain from the trend start to the top of the head-and-shoulders top is more than 40%, tend to outperform.

Busted Head-and-Shoulders Top: Entry Setup

Picture of a green snake

As an entry setup, here are the rules for trading busted head-and-shoulders tops.

  1. Find a confirmed head-and-shoulders top.
  2. Price must not close lower than 10% below the breakout price of the head-and-shoulders top.
  3. If the trend start is more than 113 days away from the top of the left shoulder then skip the trade.
  4. If the trend start to the top of the head-and-shoulders top is less than 40%, then skip the trade.
  5. Place a buy stop a penny above the head.
  6. Price rises and closes above the top (highest peak) of the head-and-shoulders top. This confirms a busted head-and-shoulders top.
  7. Place a stop loss order to sell if price closes below the bottom of the head-and-shoulders top. If it's too far away, then adjust it as necessary, but doing so increases the risk of failure.
  8. Hold until the trend changes and then sell.

-- Thomas Bulkowski

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See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com. If you buy ANYTHING while there, they pay for the referral.

My novels:      New                  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns

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