A head-and-shoulders test during a bear rally

The working downtrend

A late-2002 case defined a primary downtrend as a sequence of lower highs and lower lows. That sequence remained the working hypothesis until contrary price structure appeared.

The same case withheld a trend-change label until a higher low, a higher high, a break of resistance, and newly accepted support were in place.

The completed top

A weekly large-cap index chart was presented as a completed head-and-shoulders top whose neckline sat near 965. A hold above that level was required before an uptrend could be confirmed.

A head-and-shoulders pattern is a three-swing reversal template of left shoulder, head, and right shoulder around a neckline. A top argues that an advance has lost control. The neckline is the boundary connecting the reaction points between shoulders and head. A decisive move through it completes the pattern and supplies the measuring baseline.

The left shoulder, head, and right shoulder were narrated as a multi-month shift from buyer control at the late-1990s peak to seller control. The right shoulder stalled near the same area as the left before a failed neckline test.

A measured-move objective

Applying the measured-move rule, the write-up subtracted the neckline from the head, taking 1553 minus 965. It then subtracted that 588-point height from the neckline to produce a minimum downside objective of 377. A measured-move projects the head-to-neckline height an equal distance beyond the neckline as a minimum structural objective, not a promise of arrival.

A depositary-receipt proxy of the same market was used as a second head-and-shoulders confirmation. The same height rule produced a projected level of 40 against a then-recent price near 90.

Volume and price alignment

Volume-price analysis noted participation expanding with advances on the left side of the pattern and with declines on the right. Same-direction volume and price were treated as constructive. Opposite movement was treated as a warning.

The method reads whether participation expands with advances or with declines to judge which side is funding the move.

The Relative Strength Index as a second reading

Relative Strength Index readings were described as declining with money-flow measures. Volume-inclusive flow tools were treated as stronger confirmation than the Relative Strength Index, stochastics, or a commodity-channel reading alone.

The Relative Strength Index is a bounded momentum oscillator. In this case it was used as a second reading on whether a bounce has enough internal strength to challenge a completed top.

What still had to happen

Until a hold above the neckline near 965 appeared, the completed top and the failed neckline test stayed inside the primary-downtrend hypothesis. A new-trend label still required a higher low, a higher high, a break of resistance, and newly accepted support.

Those price tests were the archive rule for replacing a sequence of lower highs and lower lows. Volume-price alignment and the Relative Strength Index were further readings on whether a bounce had earned that label.