Price Action Following Confirmation: The Measuring Formula

The final step, the downside penetration of the neckline, may be attended
by some increase in activity, but usually isn’t at first. If volume remains small
for a few days as prices drift lower, a “Pullback” move frequently ensues
which brings quotations up again to the neckline level (rarely through it).
Normally, this is the “last gasp”; prices then turn down quickly, as a rule,
and break away on a sharply augmented turnover. Whether or not a Pullback Rally will occur after the initial penetration seems often to depend on the
condition of the market in general. If the whole market trend is turning down
at the same time as our individual issue, which has just completed its Headand-
Shoulders, there will probably be no Pullback; prices instead will tend
to accelerate their decline, with activity increasing as they leave the vicinity
of the Top. If, on the other hand, the general market is still firm, then an
attempt at a Pullback is likely. Also, the odds seem slightly to favor a Pullback
if the neckline has been broken before much of a right shoulder developed,
but certainly no very sure rules can be laid down. In any event, the Pullback
Rally is of practical interest chiefly to the trader who wants to sell the stock
short, or who has sold it short and has then to decide where he should place
a stop-loss order.
Now we come to one of the most interesting features of this basic Reversal
Formation — the indication which it gives as to the extent (in points) of the move which is likely to follow the completion of a Head-and-Shoulders.
Measure the number of points down vertically from the Top of the head to
the neckline as drawn on the chart. Then measure the same distance down
from the neckline at the point where prices finally penetrated it following
the completion of the right shoulder. The price level thus marked is the
minimum probable objective of the decline.

Let us hasten to state one important qualification to the Head-and-
Shoulders Measuring Formula. Refer back to our original set of specifications
for a Head-and-Shoulders. Under A, we required “strong rally climaxing a
more or less extensive advance.” If the up-move preceding the formation of
a Reversal Area has been small, the down-move following it may, in fact
probably will, be equally small. In brief, a Reversal Pattern has to have
something to reverse. So, we really have two minimums, one being the extent
of the advance preceding the formation of the Head-and-Shoulders and the
other that derived by our measuring formula; whichever is the smaller will
apply. The measuring rule is indicated on several of the examples that
illustrate this chapter. You can see now why a down-sloping neckline indicates
a “weaker” situation than an up-sloping, and just how much weaker,  as well as the fact that more than half of the minimum expected weakness
has already been expended in the decline from the Top of the head to the
penetration of the neckline.
The maximum indications are quite another matter, for which no simple
rules can be laid down. Factors that enter into this are the extent of the
previous rise, the size, volume, and duration of the Head-and-Shoulders
Formation, the general market Primary Trend (very important), and the
distance that prices can fall before they come to an established Support Zone.
Some of these are topics for later discussion.