Reversal Patterns 2 : Head and Shoulders

The head-and-shoulders pattern is one of the most popular and reliable chart patterns in technical analysis. And as one might imagine from the name, the pattern looks like a head with two shoulders. A Head and Shoulders pattern forms when one peak, followed by a higher peak, which is then followed by a lower peak, and finally a break below the support level established by the two troughs formed by the pattern. The head-and-shoulders is a signal that a share price is set to fall..

As the Head and Shoulders pattern unfolds, volume plays an important role in confirmation. 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

Inverse Head and shoulders Pattern:

The second version, the inverse head and shoulders, signals that a share price is set to rise and usually forms during a downward trend. As the name indicates, it is a mirror image of the head and shoulders pattern signaling that the price is set to raise .Needless to say, volume plays an important role here too. Without the proper expansion of volume, the validity of any breakout becomes suspect.

Head and Shoulder

Inverse Head and Shoulder

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  1. Reversal Patterns 1 : Double tops and double bottoms
  2. A study of chart patterns
  3. Continuing patterns 2 : Triangles

1 Response to “Reversal Patterns 2 : Head and Shoulders”

Blue

September 20, 2011 at 6:29 pm

I’ll try to put this to good use immdeiatley.

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