The Head & Shoulders Pattern on the RSI

Applying a Simple Head & Shoulders Pattern on the RSI

Technical pattern recognition is a mostly subjective field where the analyst or trader applies theoretical configurations such as head and shoulders in order to predict the next likely direction. However, we rarely apply them on indicators which may be intuitive but worth a shot. This article discusses applying a direct and flexible version of head & shoulders pattern on the relative strength index.

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The Head & Shoulders Pattern

Old school chartists are very familiar with head & shoulders patterns which signal reversals and give the potential of said reversals. Despite their simplicity, they are very subjective and some are not visible like the others. This hinders the ability to know whether they add value or not. Luckily, we can simplify the conditions using algorithms. The below shows an example of a head & shoulders.

Head & shoulders pattern. This is a bearish configuration.

We can notice three important elements in a head & shoulders:

• The neckline: This is the line linking the lowest low between the three peaks and the beginning/end of the pattern. It serves to determine the pull-back level.
• The pull-back: Having broken the neckline, the market should shape a desperate attempt…