A head and shoulders pattern is purely a reversal pattern. It occurs in uptrends only. This pattern consists of 3 peaks. A stock’s price will make the first peak (shoulder) and retreat. It will then make the second peak (head) higher than the first peak and retreat. It will make a third peak (shoulder) but the third peak will reach only as high as the first peak. The key to this being a reversal pattern is the neckline. The neckline is the price level to which all the peaks retreat to. If a stock breaks the neckline, this is the signal it may start a downtrend. This pattern is highly effective. This pattern is also loosely interpreted and does not always occur as textbook examples. Sometimes one shoulder will be extended. Other times the pattern may slant upward or downward. We will include as many examples as we can to help you identify this pattern.
