In the CFAI text book under the topic, Setting price targets with head and shoulders pattern (Reading 12, page 621), I came accross this line;
'If the preceding rally started at a price higher than the neckline, the correction is unlikely to bring the price lower than the price level at the start of the rally’
Can someone please help me understand this line???
Rally of price will take it from down (Shoulder) to up towards a peak (head) then down again (termed “correction”) to the second shoulder, not any lower.
Try drawing the movement of the price. Shoulder - up to a head- down to the other shoulder.
Shoulders are expected to be aligned…same level. Hence " correction is unlikely to bring the price lower than the price level at the start of the rally"
Thanks Henda. Thats really helpful. 