Pattern Description
The Head and Shoulders pattern is one of the most reliable trend reversal patterns. It consists of three peaks, with the middle peak (head) being the highest and the two outside peaks (shoulders) being lower and roughly equal. The line connecting the low points between the peaks is called the neckline.
Trading Implications
When the price breaks below the neckline after forming the right shoulder, it signals a potential trend reversal from bullish to bearish. The price target is typically estimated by measuring the distance from the head to the neckline and projecting that distance downward from the neckline breakout point.
Key Characteristics
- Volume typically decreases as the pattern forms
- Volume increases on the neckline breakout
- The pattern usually forms over 1-4 months
- The neckline can be horizontal or slanted