Head and Shoulders Chart Pattern

The so-called “Head and Shoulders” pattern is a reversal pattern, and bearish as well. It is formed by three attempts to rally, and is one of the favored reversal signals when seen. What happens is that the buyers make a fresh, new high, and then proceed to rally yet again. The second rally goes higher than the first one which of course should be a very bullish sign. However, the market pulls back again and on the third rally the buyers could not reach fresh new highs. With this, you have a pattern of three rallies that look a bit like a head with to shoulders on either side. This shows that the buyers are running out of momentum. Also, you have what is known as the neckline, which is the bottom or up trending line below that offers support for the entire pattern.

Head and Shoulders formation.

Head and Shoulders formation.

Looking at the chart below, you can see that once we broke the bottom of the pattern itself, or the “neckline”, we fell significantly. This shows that the buyers ran out of momentum, and the sellers took control. Keep in mind that you can measure from the neckline to the top of the head in order to get the potential target once we break down below the neckline. As you can see, this market had no issues whatsoever hitting that region, and this ended up being an excellent trading opportunity.

Head and Shoulders in action.

Head and Shoulders in action.

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