Emark,Thought I'd add some further information about the reverse...

Emark,

Thought I'd add some further information about the reverse H&S scenario as explained by 9lives to help explain why this works as support.

Firstly, understand that prices always move within channels.

In the case of a bottom, the price will usually exhaust itself by falling out of a downtrending channel, usually to the bottom of the next channel down. Note though that we bottomed recently only with a false break down from the channel - we haven't exhausted via a fall to the bottom of the next channel.

So the period of time prior to dropping down from the channel when price is trying to hold in the channel is the first shoulder, and the fall into the next channel the head (so at the moment - XAO: 3940 and 3690). A recovery then occurs, where the price usually runs back up to the top of the original downtrend channel (ie. usually a move of 2, maybe 3 channels - usually from the bottom of the new channel to the top of the old channel).

Now before moving higher, the price has to retest the bottom of the old channel to ensure it still holds. So this fall back (if it holds), becomes the second shoulder. Because the channel is in a downtrend, the bottom of that channel is slightly lower as time has passed. So, if it holds the old support level - in our case XAO 3940 (ie. the 2nd shoulder) - this will mean an incomplete fall across the channel and so a bullish sign for a big rally (if it holds 4000 then that's even more bullish). If it falls right to the bottom of the old channel - which is now at about 3800 - this is also ok as the 2nd shoulder but a rally will be more sluggish.

Note that if we were to test 3800ish, fail to hold then fall significantly below 3800 we will have broken from the old channel and we would be heading down either a half channel (probably to 3450) or full channel (probably to about 3100).


Probably confusing, but hopefully this helps some readers understand the H&S concept better (same principle as reverse H&S, but uptrend channels).