EURUSD - Not a Head & Shoulders Pattern

This is NOT a Head & Shoulders Pattern.

Nor is this:

Yesterday I was sent some research from a Tier 1 investment bank that went as follows:

EURUSD: Breached the head and shoulders neckline at 1.3037 and is also threatening to take out important support at 1.3004 (breached intraday already). A close below 1.3004 would confirm this bearish break and suggest a move down to the 1.25 area. 

Many years ago, I worked with a brilliant Technical Analyst who would react with fury on an almost daily basis to traders coming up to her telling her that they had found a Head & Shoulders pattern and had loaded up a position on the back of it.  When she looked into the pattern she would advise them that in nearly all cases these were not H&S patterns, and that their rationale for the position was incorrect, in most cases she was proved right. The biggest mistake she would point out was the Head & Shoulders patterns are ‘End of Trend’ patterns, they occur in the wake of a significant trend, and are usually relative in size to that trend. (There are of course other qualifying criteria this article here covers this nicely).

I was I admit quite surprised to see this investment bank sending out a report with such a basic error in it. – I do not dispute the overall bearish nature of the EURUSD at present, however the tendency to look for patterns in markets to supports one’s view rather than observing price action and data objectively are fundamental analytical flaws, more generally known as ‘confirmation bias’, it is also lazy analysis. 

I am not being pedantic here (ok maybe I am slightly), but from my experience mis-labeling of patterns can create a false sense of confidence. I do not disagree with the fundamental premise of the analysis, a close below 1.3004 would be bearish, however the readers attention would have been drawn to the initial comment about the neckline of the Head & Shoulder being broken, this may have led them to false conclusions more so than the qualifying comment which followed it. 

 

To finish I would like to present some good examples of Head & Shoulders patterns: The chart below shows the SP500 over the past few years, with three major ‘Head & Shoulders Patterns’, two successful and one failed. – The two successful ones proved spectacularly effective at signalling sharp moves ahead, the other one not so, however even failed patterns can prove useful, in that their failure can often signify that the prior trend is likely to re-assert itself. And note how the failed pattern itself ended in a perfect inverted Head & Shoulder Pattern.

When Head & Shoulders patterns work they can be spectacularly successful signals for market direction, however the world is littered with failed traders who spent too much time looking for patterns which aren’t or weren’t really there.