The Head & Shoulders Pattern  

 

 

The Head and Shoulders Pattern is generally regarded as a reversal pattern and it is most often seen in up-trends. It is also most reliable when found in an up-trend as well. Eventually, the market begins to slow down and the forces of supply and demand are generally considered in balance.

 

  • Sellers come in at the highs (left shoulder) and the downside is probed (beginning neckline).

  • Buyers soon return to the market and ultimately push through to new highs (head).

  • However, the new highs are quickly turned back and the downside is tested again (continuing neckline)

  • Tentative buying re-emerges and the market rallies once more, but fails to take out the previous high. (This last top is considered the right shoulder.)

  • Buying dries up and the market tests the downside yet again. Your trend line for this pattern should be drawn from the beginning neckline to the continuing neckline.


Volume has a great importance in the Head and Shoulders Pattern. Volume generally follows the price higher on the left shoulder. However, the head is formed on diminished volume indicating the buyers aren't as aggressive as they once were. And on the last rallying attempt-the left shoulder-volume is even lighter than on the head, signaling that the buyers may have exhausted themselves.


New selling comes in and previous buyers get out. The pattern is complete when the market breaks the neckline. (Volume should increase on the breakout.)

The Head and Shoulders Pattern can sometimes be inverted.

The inverted head and shoulders is typically seen in downtrends.

What's noteworthy about the inverted head and shoulders is

the volume aspect.

  • The inverted left shoulder should be accompanied by

  • an increase in volume.

  • The inverted head should be made on lighter volume.

  • The rally from the head however, should show greater volume than the rally from the left shoulder.

  • Ultimately, the inverted right shoulder should register the lightest volume of all.

  • When the stock then rallies through the neckline, a big increase in volume should be seen.


 

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