FIGURE 4.21 Regular and Inverted Head and Shoulder Patterns often Exceed Price Objectives
the neckline in an inverted head and shoulders bottom to confirm that prices indeed have reversed and that the momentum is now positive. The two-period close negates the equal-and-opposite reversal formation as well (see Figure 4.21).
The cup and handle pattern is a bullish continuation pattern that is formed with a saucer or rounded bottom and then breaks out only to correct back down before resuming a continuation of the uptrend. It is a type of "W" bottom. William O'Neil is credited with introducing this pattern in his book, How to Make Money in Stocks (McGraw-Hill, 1988). Figure 4.22 shows the making of this pattern; there is a high frequency of this variation that occurs in the forex market since the concept is based on the premise that it forms in a bullish accumulation period. As its name implies, there are two parts to the pattern: the cup and the handle. The cup forms after a decline; and as prices consolidate, the market forms the rounded bottom. As the cup formation completes, a small trading range develops on the right-hand side, and the handle is formed. A breakout from the handle's trading range signals a continuation of the prior advance.
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