HEAD AND SHOULDERS PATTERNS
Head and shoulders is another popular pattern and it is quite a reliable reversal pattern. It often has a symmetrical pattern in respect of the price magnitude and the time spent during the formation of the pattern.
Basically, a head and shoulders top pattern is a bearish signal. It consists of a peak followed by a higher peak and then another lower peak that fails to hold the continuing uptrend with a break below the neckline. The neckline is the trend line drawn across the lows of the two intervening troughs.
The highest peak is the head of the pattern and the peaks to the left and right of the head are the shoulders. The shoulders are priced lower than the head and are about the same distance from the head. After a strong rise, the left shoulder is formed when prices face resistance from selling pressure and make a correction to a level, which attracts further buying support. When prices begin to rise above the last peak, or the left shoulder, sellers suddenly take control of the market and push prices downward below the low of the left shoulder, creating the formation of the head. When prices correct to about the level of the last trough of the left shoulder, buyers begin to reenter the market to drive prices upward. This time, prices fail to exceed the highs of the head. Normally, prices will face resistance at about the high of the left shoulder and make a retreat downward, forming the right shoulder. A head and shoulders pattern is completed when ...