HUnderstanding a Head and Shoulders top/FXE

 Here's the H&S pattern, very rarely do they look like what you see in books, for that reason and for the reason of people not understanding the emotional aspect that forms the pattern, if is often mistaken as people rely on the price formation itself-VOLUME is crucial. We are looking at the Euro through the ETF, FXE. First to get an idea of the downside associated with the pattern, you need to measure the neckline (support) and the top of the head. In this case we get approximately $170.70 and $142.48. Deduct the neckline from the top of the head (170.70-142.48=$28.22) that's our downside target from the point in which the pattern is broken when price crosses below the neckline. Assuming a neckline of $130 (currently) we get a target near $100. Often H&S patterns will overshoot to the downside though.

 Here's the test of the pattern, volume. I've constructed a simple cumulative volume indicator to better illustrate the trends in volume. You want to see diminishing volume on the rallies and rising volume on the declines, especially as the pattern progresses, but it's not uncommon to see the heaviest volume on the decline from the head.

Here 3C verifies distribution taking place at key points in the shoulder and head tops.

FXE or the Euro seems to be finishing this pattern and will most likely break down pretty hard. There is an element of pattern manipulation, but it is usually on short timeframes and a large pattern like this is pretty reliable.

If you wish to go long, you can use the Dollar Index or the leveraged version which is UUP as 50% of the dollar index is made up by the Euro. This is why I remain bullish on the dollar in the intermediate term and bearish on Europe and particularly the Euro.