The "head and shoulders" pattern is a technical analysis chart pattern that can indicate a reversal in the price trend of a security. It consists of three peaks: a higher peak (the head) surrounded by two lower peaks (the shoulders). The pattern suggests a transition from bullishness to bearishness:
- Left shoulder: The price rises, then falls back.
- Head: The price rises again to a higher peak than the left shoulder, then falls back again.
- Right shoulder: The price rises one more time but not as high as the head, then falls back towards the neckline.
Key features:
- Neckline: A line drawn across the lows of the left shoulder, head, and right shoulder. It acts as a support level.
- Confirmation: Typically, traders look for the price to break below the neckline after the formation of the right shoulder to confirm the pattern.
- Volume: Volume tends to decrease as the pattern forms and increase on the breakout.
Once confirmed, the head and shoulders pattern suggests that the previous upward trend is weakening, and a potential reversal to a downtrend might occur. It's essential to wait for confirmation before acting on the pattern, as false signals can occur.
Tags:
Pattern Analysis