The Head and Shoulders formation is one of the most famous chart patterns, known for its performance in bullish conditions. It appears as a series of three peaks with the middle one being the highest (the "head"). While the first and the third peaks (the "shoulders") need to be lower than the head, it is not required that they are of the same height. Similarly, the line that connects pattern bottoms, often called "the neckline", does not need to be strictly horizontal, necklines with a slope upward tend to be a reinforcing indicator.
When a Head and Shoulders formation is seen in an uptrend, it signifies a major reversal. The strength of this reversal, measured as the decline amount after breakout, is proportional to the rise before pattern emergence: stronger preceding trends are prone to more dramatic reversals. Volume is usually the highest at the left shoulder but most likely to deplete by breakout point, although, as one might expect, conditions where the volume is trending up are more favorable.
Pullbacks occur more often than not, which might somewhat worsen the post-breakout performance.
For educational purposes only. Not a recommendation of a specific security or investment strategy.
Technical analysis is not recommended as a sole means of investment research.
Past performance of a security or strategy does not guarantee future results or success.