Sunday, December 7, 2008


The head and shoulders pattern is generally regarded as a reversal pattern and it is most often seen in uptrends. It is also most reliable when found in an uptrend as well.

Eventually, the market begins to slow down and the forces of supply and demand are generally considered in balance.

Sellers come in at the highs (left shoulder) and the downside is probed (beginning neckline.) Buyers soon return to the market and ultimately push through to new highs (head.) However, the new highs are quickly turned back and the downside is tested again (continuing neckline.)

Tentative buying re-emerges and the market rallies once more, but fails to take out the previous high. (This last top is considered the right shoulder.) Buying dries up and the market tests the downside yet again. Your trendline for this pattern should be drawn from the beginning neckline to the continuing neckline.

(Volume has a greater importance in the head and shoulders pattern in comparison to other patterns. Volume generally follows the price higher on the left shoulder. However, the head is formed on diminished volume indicating the buyers aren't as aggressive as they once were. And on the last rallying attempt-the left shoulder-volume is even lighter than on the head, signaling that the buyers may have exhausted themselves.)

New selling comes in and previous buyers get out. The pattern is complete when the market breaks the neckline. (Volume should increase on the breakout.)

Recently AirAsia Berhad has announced lost money on trades held by the bankrupt Lehman Brothers Holdings Inc. and on wrong-way bets on oil prices. AirAsia posted a loss of RM 465.5 million in the third quarter as it had a charge of RM 215 million to cover costs from unwinding hedging contracts and the likely non-recovery of collateral for trades held by Lehman.


alexlee said...

Yes, this is a head & shoulder chart pattern for Airasia. Price has breach down the neckline, means more selling pressure for these counter at these moment.

khengsiong said...

I don't know how to read the pattern, but I think AirAsia expanded too fast. It added many routes and bought many aircrafts. Things certainly don't look good.