| We also know that when the pattern changes, we ought to pay attention. If this stock had fallen below the lower trend line to $130 in February, that would've suggested that the pattern was broken and that we couldn't rely on the stock rebounding back toward the upper channel line. Another reliable pattern is the head and shoulders pattern. This is a very bearish signal that suggests demand for the stock is drying up. A head and shoulders pattern occurs when a stock or market is rising and hits three peaks. After making the first peak (or left shoulder), the price declines a bit and then rises to a higher second peak, often on lower volume than it had for the first high. This second peak is known as the head. The price then drops again before climbing to a third peak that is lower than the second. Volume on this peak, the right shoulder, is lower than it was for the left shoulder or the head. If all of these conditions are met, a head and shoulders pattern has formed. This is a strong sign that buying power is evaporating and that the bulls don't have enough firepower to get the stock to a new high. In his renowned Encyclopedia of Chart Patterns, Thomas Bulkowski looked at various chart patterns and quantified how successful they are at predicting stock moves. After studying 2,800 trades that displayed the head and shoulders pattern, he found that the average decline was 16% and the stock dropped 68% of the time when the pattern appeared. That's good information to know, because it tells you that if you notice a head and shoulders pattern in a stock's chart, you'd be better off waiting and letting the price come back down. Or, if you're an active trader, a stock in a head and shoulders formation would be a potential short candidate. Whenever I discuss technical analysis, I always mention that stock charts and chart patterns are not crystal balls. But by understanding how human behavior repeats itself and how we can identify when those behaviors are occurring, we can greatly tip the odds of successful investing and trading in our favor. All the best traders use charts and patterns. If you're not using them, you're leaving a lot of money on the table. Walking into that classroom (and several others after that) was one of the best decisions I ever made for both my career and my personal finances. Good investing, Marc P.S. If you thought Power Channels and head and shoulders patterns were impressive... Just wait until next week, when I tell you about my all-time favorite chart pattern. In the Encyclopedia of Chart Patterns, Tom Bulkowski studied 307 instances of this pattern appearing in a stock's chart... And the stock moved higher every single time. Plus, he wrote that this record-setting pattern "was the best-performing chart pattern in both bull and bear markets." Be sure to check out my column next Tuesday to learn more! | 
