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Head and Shoulders Patterns

Head and Shoulders Pattern

The Head and Shoulders Bottom (Reverse Head and Shoulders) is created by three successive declines in the price following a signicant downtrend. The lowest low (head) is in the middle, anked by two higher lows (shoulders) at roughly the same level. Volume is highest as the price makes the rst two declines, then diminishes through the right shoulder. Finally volume surges as the price closes above the neckline – drawn between the two highs – to conform the BULLISH reversal. The Head and Shoulders Top is the bearish counterpart signaling a major trend reversal downward.

head_shoulders

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Head and Shoulders Patternn (Alternate Definition)

Although occasionally an Inverted Head-and-Shoulders Pattern (called a Consolidation Head-and-Shoulders) will form, which is a Continuation Pattern, in its normal form, this pattern is one of the more common and more reliable of the Major Reversal Patterns.

It consists of the following four elements (a Head-and-Shoulders Top will be described for illustration):

  1. a rally which ends a more or less extensive advance on heavy volume, and which is then followed by a Minor Reaction on less volume; this is the left shoulder;
  2. another high-volume advance which exceeds the high of the left shoulder, followed by another low-volume reaction which takes prices down to near the bottom of the preceding reaction, and below the top of the left shoulder high; this is the head;
  3. a third rally, but on decidedly less volume than accompanied either of the first two advances, and which fails to exceed the high established on the head; this is the right shoulder; and (4) a decline through a line drawn across the proceeding two reaction lows (the neckline), and a close below that line equivalent to 3% of the stock’s market price. This is the confirmation of the breakout.

A Head-and-Shoulders Bottom, or any other combination Head-and-Shoulders Pattern, contains the same four elements. The main difference between a Top Formation and a Bottom Formation is in the volume patterns. The breakout in a Top can be on low volume. The breakout in a Bottom must show a “conspicuous burst of activity.” Minimum Measuring Formula: add the distance between the head and neckline to the breakout point.

Source: Edwards, Robert and Magee, John. Technical Analysis of Stock Trends 9th Edition; (c) 2007.

 

Head and Shoulders Bottom

Area Pattern which reverses a decline.

Source: Edwards, Robert and Magee, John. Technical Analysis of Stock Trends 9th Edition; (c) 2007.

head_and_shoulders_bottom

Source: Charts created by Bloomberg LP.  All rights reserved. Click here for more information on Bloomberg.

 

Head and Shoulders Consolidation

Area Pattern which continues the previous trend.

Source: Edwards, Robert and Magee, John. Technical Analysis of Stock Trends 9th Edition; (c) 2007.

head_and_shoulders_consolidating

Source: Charts created by Bloomberg LP.  All rights reserved. Click here for more information on Bloomberg.

 

Head and Shoulders Top

Area Pattern which reverses an advance.

Source: Edwards, Robert and Magee, John. Technical Analysis of Stock Trends 9th Edition; (c) 2007.

head_and_shoulders_top

Source: Charts created by Bloomberg LP.  All rights reserved. Click here for more information on Bloomberg.

 

Hybrid Head and Shoulders Pattern

A small Head-and-Shoulders Pattern within a larger Head-and-Shoulders Pattern.

Source: Edwards, Robert and Magee, John. Technical Analysis of Stock Trends 9th Edition; (c) 2007.

hybrid_head_and_shoulders

Source: Charts created by Bloomberg LP.  All rights reserved. Click here for more information on Bloomberg.