Canada Markets

The head-and-shoulders reversal pattern is suggested to be one of the best know and also one of the most reliable of reversal patterns.

As seen on the attached graphic, the move higher on the January contract began on Oct.1 from a low of $9.12 1/4/bu. The first shoulder was formed in the Oct. 28 to Nov. 4 period, when a high of $10.59 1/4/bu was reached on Oct. 30. Another indicator of the pattern is that the highest volume is reached on the first or left shoulder of the pattern, with the volume high reached on Oct. 29 at 205,884 contracts.

After a four-day downtrend, prices rallied again to the head, with a high of $10.86 1/4/bu reached on Nov. 12, higher than the first shoulder and a sign that the uptrend remained intact. The Nov. 12 high; however, was achieved on lower volume of 176,947 contracts, a sign of waning commitment on the part of buyers.

The second or right shoulder was formed with a third rally, reaching a high of $10.54 3/4/bu on Nov. 26. The significance of this trading bar is that this high failed to exceed the $10.86 1/4/bu high reached on November 12, which signals the end of the uptrend. The right shoulder was also formed on even lower volume, a sign of a growing lack of commitment on the part of buyers or waning bullishness.

The pattern will be formed when the neckline is broken, shown here as an upward-sloping black line which connects the lows created throughout the pattern. This level is seen at $10.09 1/4/bu.

The measuring implications of this pattern are determined by measuring the distance from the head to the neckline, which can be used to set a target upon the final move below the neckline. For example, the distance from the head to the neckline is estimated at $10.86 1/4 less $9.99 1/4/bu or 87 cents/bu. The target would then be generated by subtracting the 87 cents from the point at which the neckline is violated, which could mean almost a full retracement to the October low.

Cliff Jamieson can be reached at cliff.jamieson@dtn.com

Follow Cliff Jamieson on Twitter @CliffJamieson

(ES)

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