Greetings Traders,
In today's lesson we're going to take a closer look at one
of the thirty-two chart patterns I teach in my course. It's the "Head
& Shoulders Top (H&ST)" and it's known for being 80%
reliable in calling market tops! Simply put, when you find this chart
pattern at market highs, you have an 80% chance that prices will fall
below the neckline support producing your entry point to sell the market.
Just what is a H&ST and why does it form? In the most
basic explanation, it's simply a painful rollover between traders who are
bullish and those who are bearish. The left shoulder on the diagram below
was a market top, then prices retreated due to increased selling pressure
from bearish traders. The bullish traders who were already in the market,
and those waiting to get in, saw the price decline as a buying
opportunity. So now the bullish traders enter the market shooting prices
to new contract highs forming the Head of the formation. Selling reentered
the market again driving prices lower to form a neckline support area. By
this time many of the bullish traders have jumped ship or switched their
views, however, there is enough buying pressure left to make one more push
higher to form the Right shoulder. Unfortunately for the bulls, there are
not enough of them left to make another push higher so the sellers gain
full control and prices trade below the neckline.
To trade this formation we simply sit on the sidelines and
wait for prices to trade below the neckline, then sell a futures contract
and/or purchase options. As a general rule, measuring the distance from
the top of the head to the neckline and projecting that amount from the
neckline lower gives you your first profit objective.
Before we look at real chart examples of this formation,
it's important for you to note that they come in all sizes and
shapes so they don't always look like text book examples. That's why I
include many real market chart examples here and in my course
in order to help you find these patterns in the real world.
The Live Cattle market is one of the easiest markets to
trade. Influenced by producers, feedlots, slaughter houses, and short-term
supply and demand from consumers. This combination presents a pretty
reliable 90 - 120 day cycle or seasonal pattern. Generally, you'll see a
Double Top, a Head & Shoulders Top, or a 1-2-3 Top formation every 90
- 120 days.
This particular chart had two H&ST on it within two 90
- 120 day cycles. Notice, however, they certainly look a little out of
shape compared to the text book example. You just have to remember to
connect all your points (LS - H - RS and neckline support).
Next:
Here's another Live Cattle Chart. There's that 90 - to
-120 day cycle again! The H&ST could not have been traded with futures
contracts because of the locked limit market conditions. In a locked limit
market no trading takes place in the futures but the option trading pits
are open and taking orders as they are not effected by limit moves.
Just another reason for you to consider trading options.
On that first limit down day you could have purchased a put option for
$300 or $400 bucks and cashed it in Six days later for near $6,000.00.
That's about 600% return on investment while futures contract traders were
still sitting on the sidelines scratching their heads! However, I sure
those bullish traders that made that last push higher to form the Right
shoulder have my course to show them how to offset a losing futures
position that's locked limit against them with options!
Today's chart master lesson not only shows you how to
trade the H&ST, you've also learned about the 90 - 120 day market
cycle in cattle. Now, this cycle is no secret among traders, but very few
retail traders (you and I) use this information in their analysis.
The very best way to become a chart master is to practice
and try not to complicate matters. In short, if it looks like a H&ST
then it likely is. The most useful lesson I've learned in all my years of
doing this is the fact that trading can be as difficult or as simple as
you make it.
Don't forget, when you're following the 90 - 120 day cycle
in cattle your chart patterns to look for are the Double Top, a Head &
Shoulders Top, or a 1-2-3 Top formation.
If you found this lesson beneficial, consider getting
my full course and trade alerts. You'll find many more option and
futures trading strategies. And, I'll guide you every step of the way to
insure your success!
Trade Well,
Archie Johnson
PS. In my new course I will show you how to trade
chart patterns with options and futures contracts with as little as $2000
and only the knowledge I supply you with. This two volume course with
video presentations will be available later this year for $397.00.
However, you can get it for zero cost by joining the VTU lifetime
membership today. But you don't have to wait on the new course to get
started because I'll show you how to trade the same strategies right now
in my VTU chart pattern secrets trade alerts.
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