Lecture Notes: Head and Shoulders Pattern and 20 MA Halt

Introduction

• Discussion on Head and Shoulders pattern
  • Includes reverse Head and Shoulders
  • Key features:
    • Left shoulder
    • Head
    • Right shoulder
    • Neckline: important for breakouts
• Significance of 20 MA (moving average)
  • Stocks should respect the 20 MA line
  • Moving averages represent areas, not narrow lines

Criteria for Stock Movement

Below the 20 MA

• Stock should start sufficiently below the 20 MA
• Important to have space between the stock and 20 MA

Above the 20 MA

• Stock should rise above the 20 MA convincingly
• Not just a small break, but a clear move above

The 20 MA Halt

• Stock should retest and halt at the 20 MA
• Look for distinct signals such as color change or specific bars
• Do not anticipate; wait for a clear signal

Importance of Signal

• The signal should be clear and strong
• Look for indicators like:
  • Bottoming tail bar
  • Bull 180
  • Narrow range bar explosion
• Buy only after receiving a solid signal

Application and Examples

Real-World Examples

• Mention of stocks like PayPal and Uber as examples of 20 MA halts
• Importance of starting below the 20 MA and breaking through convincingly

Importance of Momentum

• Stock should show significant power after the 20 MA halt
• Look for strong, unmistakable movement

Trading Strategy

20 MA Halt Play

• Applicable on all time frames (2-minute, 5-minute, daily, etc.)
• Spend time under a declining 20 MA
• Criteria:
  1. Time spent below a declining 20 MA
  2. Convincing break above 20 MA
  3. Retest and halt at 20 MA

Trading Steps

• Identify the stock spending time under the declining 20 MA
• Look for the first convincing break above
• Wait for a retest and halt at the 20 MA
• Enter buy position on the first strong signal (power green bar)
• Set stop-loss slightly below the entry bar

Risk Management

• Enter on first power green candle
• Set protective stop-loss below the entry bar
• Limit loss to one bar per trade to ensure long-term sustainability

Conclusion

• Mastery of the 20 MA halt strategy can lead to effective trading
• Manages risk with consistent strategies
• Important to capitalize on strong signals and manage losses effectively