Head and Shoulders

Please register and/or login to access this content.

REGISTER     LOGIN

Head and Shoulders Pattern

head-shoulders
Bearish reversal Head & Shoulders pattern at the end of a long uptrend.
The Head and Shoulders pattern has the shape of a head and two shoulders, as the name suggests. A Head and Shoulders pattern can act as a reversal or as a continuation pattern. Whether it acts as a reversal or continuation pattern depends on the trend prior its formation.

The Head and Shoulders pattern is regarded as a bearish chart pattern that can form after a bullish trend. It consists of 3 tops with a higher high in the middle, called the head. The line connecting the 2 valleys is the neckline. The height of the last top can be higher than the first, but not higher than the head. In other words, the price tried to make a higher high, but failed. The closer the 2 outer tops are to the same price, the more accurate the pattern.

https://medium.com/@CryptoTutor/a-short-explanation-the-head-and-shoulders-chart-pattern-21f6817fba59

During an uptrend, the first peak (left shoulder) forms after supply exceeds demand, leading to a pullback or retracement. Buying pressure dries up, and sellers sell lower. Often this will be the first significant retracement in the trend. Eventually, new buyers enter the market and demand drives prices higher. Bears who shorted during the retracement of the left shoulder buy back in as well, leading to the formation of the head. The new buying power combined with the shorters buying back in leads to a peak, higher than the left shoulder.

However, buying power decreases as buyers (bulls) get exhausted, and bears gain the upper hand again. This leads to the second low of the Head and Shoulders pattern. The second low can be higher, lower or equal to the first low in the Head and Shoulders pattern. Buyers attempt to increase the price up to a new high (right shoulder). However, this time they fail as sellers increase. The inability of the buyers of increasing the price up to a new high (higher than the head) is for both the buyers (bulls) and the bears (sellers) both a psychological turning point.

bearish-continuation-head-shoulders
Bearish continuation Head & Shoulders pattern during a downtrend.
The buyers will lose confidence in reaching a higher high, and the sellers gain confidence in their stance. When the right shoulder has formed, we have a complete Head and Shoulders pattern. We have a third low (after the right shoulder), bringing us to the neckline of the H&S pattern. The neckline is the last defense for buyers (bulls) to prevent a breakdown. Once the neckline (key support) breaks, a trend in the opposite direction emerges. As a result, those going long will go short, which will strengthen the reversal of the trend.

If the price breaks the neckline and closes below it, the pattern has completed. The target can be estimated by measuring the height of the pattern (from the neckline to the head) and projecting this downwards. Common stop levels are above the neckline or above the right shoulder.

Inverted Head and Shoulders Pattern

inverse-head-shoulders
Bullish reversal Inverse Head & Shoulders pattern after a downtrend.
The Inverse Head and Shoulders pattern is the reversal of the Head and Shoulders pattern. An Inverse Head and Shoulders pattern can act as a reversal or as a continuation pattern. Whether it acts as a reversal or continuation pattern depends on the trend prior its formation.

The Inverse Head and Shoulders is regarded as a bullish chart pattern that can form after a downtrend. It consists of 3 bottoms with a lower low in the middle, called the head. The line connecting the 2 peaks is the neckline. The low of the last bottom can be lower than the first, but not lower than the head. In other words, the price tried to make a higher low, and succeded. The closer the 2 outer bottoms are to the same price, the more accurate the pattern.

bullish-continuation-inverse-head-shoulders
Bullish continuation Inverse Head & Shoulders during an uptrend.
If the price breaks the neckline and closes above it, the pattern has completed. The target can be estimated by measuring the height of the pattern (from the neckline to the head) and projecting this upwards. Common buy levels are above the neckline, after some confirmation like high volume or a second day in green.