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Head and shoulders top

Head and shoulders patternHead and shoulders top forms after an uptrend, and is one of the most powerful sell signals, let's consider it in detail. This reliable formation occurs frequently and, therefore, a clear knowledge will be of immense help to investors/traders. As mentioned in a previous issue, head & shoulders pattern is similar to triple top pattern, the only difference being that the middle peak is significantly higher compared with left and right peaks, which are usually at similar levels. Since this pattern looks like a standing man with middle peak (head) higher than the other 2 peaks (left and right shoulders), it's also very easy to identify.

Let us take a closer look at how the head and shoulders top pattern is formed. The pattern contains 3 successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows of each peak can be connected to form support, or a neckline. As its name implies, the Head and shoulders top pattern is made up of a left shoulder, a head, a right shoulder, and a neckline. Other parts playing a role in the pattern are volume, breakout, price target and support turned resistance. We'll look at each part individually, and then put them together with some examples.



  1. Prior trend

    : It is important to establish the existence of a prior uptrend for this to be a reversal pattern. Without a prior uptrend to reverse, there cannot be a Head and shoulders top pattern (or any reversal pattern for that matter).
  2. Left shoulder

    : While in an uptrend, the left shoulder forms a peak that marks the high point of the current trend. After making this peak, a decline ensues to complete the formation of the shoulder (1). The low of the decline usually remains above the trend line, keeping the uptrend intact.
  3. Head

    : From the low of the left shoulder, an advance begins that exceeds the previous high and marks the top of the head. After peaking, the low of the subsequent decline marks the second point of the neckline (2). The low of the decline usually breaks the uptrend line, putting the uptrend in jeopardy.
  4. Right shoulder

    : The advance from the low of the head forms the right shoulder. This peak is lower than the head (a lower high) and usually in line with the high of the left shoulder. While symmetry is preferred, sometimes the shoulders can be out of whack. The decline from the peak of the right shoulder should break the neckline.
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  1. Neckline

    : The neckline forms by connecting low points 1 and 2. Low point 1 marks the end of the left shoulder and the beginning of the head. Low point 2 marks the end of the head and the beginning of the right shoulder. Depending on the relationship between the two low points, the neckline can slope up, slope down or be horizontal. The slope of the neckline will affect the pattern's degree of bearishness - a downward slope is more bearish than an upward slope. Sometimes more than one low point can be used to form the neckline.
  2. Volume

    : As the Head and Shoulders pattern unfolds, volume plays an important role in confirmation. Volume can be measured as an indicator (OBV, Chaikin Money Flow) or simply by analyzing volume levels. Ideally, but not always, volume during the advance of the left shoulder should be higher than during the advance of the head. This decrease in volume and the new high of the head, together, serve as a warning sign. The next warning sign comes when volume increases on the decline from the peak of the head. Final confirmation comes when volume further increases during the decline of the right shoulder.
  3. Neckline break

    : The head and shoulders pattern is not complete and the uptrend is not reversed until neckline support is broken. Ideally, this should also occur in a convincing manner, with an expansion in volume.
  4. Support turned resistance

    : Once support is broken, it is common for this same support level to turn into resistance. Sometimes, but certainly not always, the price will return to the support break, and offer a second chance to sell.
  5. Price target

    : After breaking neckline support, the projected price decline is found by measuring the distance from the neckline to the top of the head. This distance is then subtracted from the neckline to reach a price target. Any price target should serve as a rough guide, and other factors should be considered as well. These factors might include previous support levels, Fibonacci retracements, or long-term moving averages.
The critical moment is when the price comes back to the neckline, that is, it is at the price level which has received support in the past two attempts. The head and shoulders top pattern is considered complete only when there is a neckline breakdown, or the price falls below the neckline. Since any break below the neckline results in a continued price fall, it is considered bearish. In other words, if the price falls below this resistance line, it marks the end of the previous bull market.
  1. Trading rules: As with other patterns, the rule here is simple - investors/traders can sell or go short when the neckline breakdown takes place, with a stop loss just above the neckline. The pattern is considered more powerful because the price targets are usually higher compared with double top and triple top formations. The target is measured with the total height of the pattern, that is, from the neckline to the top of the head. Though it is possible that the price may go much beyond the above-mentioned target, one should not be greedy and cut the position once the target is achieved. The other rules of double top-medium-term rally before this formation, decent patterns of height & widths, falling volume in the later tops and an increase at the time of a breakout - are applicable here also.
  2. Variations: Though the left and right shoulders should ideally be of equal height and width, it may not happen all the time. If the right shoulder is smaller than the left shoulder, it is considered to be more bearish. The two bottoms also need not be at the same price levels. This means that the neckline can slope up (see chart) or slope down. The slope of the neckline will also affect the head and shoulders top pattern's level of bullishness; an upward slope is less bullish, but the signal will come early.

Share prices charts

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Pinterest is a social photo sharing website that has also been described as an online pin board. In my case, Pinterest ranks 3rd as a source of traffic referral for my website. 1st, is Twitter, followed by Facebook. While I still love to pin images of cutesy Lab puppies, for the most part, I use Pinterest to refer traffic to my website where authors can read my blog, buy my books, or hire me.

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I refer to use Pinterest as the "Bridge to Amazon" and here is some data to back that up:
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