Head and Shoulders Pattern Index

by bug man, 5429 days ago

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This is certainly a unique indicator/composite index. It combines the data of two popular and commonly used technical analysis patterns to create an index that tells whether the bullish pattern or the bearish pattern is dominating the market.

These technical analysis patterns are the Head and Shoulders and the Head and Shoulders Inverse. Signals for these patterns are necessary and are the only data used by this index and thus you should first get the Head and Shoulders Pattern object to download the signals data. Once done, download the current composite item and plot its data or use it in analysis or backtesting.

The composite item name is '_Head_Shoulders' and its data is limited to the historical data of signals generated using the Head and Shoulders Pattern downloader. You should note that this downloader gets only the current Head and Shoulders signals. Consequently, in order to use this composite, you need to use the downloader several times, each day, to build an historical database of these signals.

This Head and Shoulders composite calculates for each trading day, the number of Head and Shoulders patterns that occur for US stocks and then subtracts this value with the number of Head and Shoulders Inverse patterns. The resulting values are generally low and this is the main weakness of this indicator or index.

In fact, because this pattern is considered to be rare (As an example, today there are only 43 patterns detected and 4 inverse patterns), the low values generated by this index have little or no effect on the overall market since only few stocks are considered. Nevertheless, a proper testing and analysis should be performed in order to draw a conclusion. I have not found time to get these tests done, but if someone plans to do the tests, please let us know in the comments.