A Head and Shoulders
pattern
(often shortened to H&S) is a
bearish stock chart technical analysis reversal pattern that is found
at
market tops. A triple top is a variation of this.
A reverse, or inverted head and shoulders pattern is a
Bullish
equivalent, found at market bottoms.
Stock chart pattern recognition
A Head and Shoulders
is one of the most reliable stock chart
patterns found in technical analysis charts, but it is
important that
volume confirms its validity. There
are some occasions when the pattern can be found as part of a
continuation phase, but in these cases it has usually not been
confirmed by volume.
The left hand shoulder
is created by a consolidation following a move
produced with good volume levels. Volume should decrease on the
consolidation before buyers push the market to new highs but with lower
volume than the LH shoulder.
This creates the head as prices decline
back to near the previous consolidation level low.
The right hand shoulder is then formed on low volume when
buyers re-enter but fail to gain momentum producing a lower
high and the markets then decline again on higher volume. The
neckline should be broken on high volume to confirm the move.
In a normal market, price will usually come back up to backtest the
validity of
the break down through support. This move should be on much lower
volume but
on rare occasions, it may not do a backtest if the market is
very weak.
Volume Confirmation
LH Shoulder - high volume
Head -
declining volume
RH Shoulder - low volume
Neckline - must
be broken on high volume
Head and Shoulders Price Targets
A valid Head and
Shoulders produces a measured move so we can
find a price target by calculating the vertical height of the Head, and
then measuring an equal distance below the neckline.
Stop Losses
An H&S fails and is not valid if prices break back above level
of the RH Shoulder before hitting its price target. Stop
Losses can be placed just above the high.
Example of a Head and Shoulders
Chart Pattern
Inverted
Head and Shoulders
A reverse, or Inverted
Head and Shoulders Pattern (often shortened to
IH&S)
is a variation of the head and shoulders and is a bullish
stock market technical
analysis charts reversal pattern that is found
at market
bottoms.
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