XES is possibly just putting the finishing touches on an inverse head & shoulders pattern with a somewhat extended right shoulder although i’m not a big fan of IHS and H&S patterns when used as continuation patterns vs. topping or bottoming patterns. head & shoulders/IHS’s are one of the most easily recognized, and hence, most over-used patterns by traders IMO…hence, a high-failure or breakout rate WHEN not properly analyzed for the ideal criteria. for example, one of the most important criteria for validating a H&S or IHS pattern is volume. on this potential IHS i show on the XES, volume patterns around both the left shoulder and head formations look pretty good. however, the most important volume criteria for the pattern calls for an expansion of volume on the advance from the low of the right-shoulder, which not only do we NOT have that here, but we actually have DECREASING volume off the left shoulder.
then why did i even bother to mention the pattern? mainly for any educational illustration. also for the fact that although the pattern might not be perfect, in a thinly traded market that is highly driven by technical pattern breakouts lately, it is likely that other traders are also watching this pattern and therefore, we could get an initial pop (or possibly more) from a neck-line breakout. in recent years i have noticed more and more traders posting HS & IHS patterns as “continuation” patterns or randomly placed just about anywhere in an existing trend. regardless of any possible IHS pattern or not, i think that horizontal line that i labeled “resistance” could prove to be an important level… bullish if solidly taken out, bearish if prices fail here. i will try to drill down into the individual names in the sector over the weekend looking for any stand-out patterns, bullish or bearish. i will categorize this as a Trade Set-up at this time as one could short the XES here, with stops somewhat above that horizontal line, or wait for a confirmed break-out above that level to enter a long-side trade. here’s is excellent overview on Head and Shoulders Topping Patterns and one on Inverse Head & Shoulder Bottoming Patterns for anyone interested.