The first “shoulder” forms after a significant bullish period in the market when the price rises and then declines into a trough. The “head” is then formed when the price increases again, creating a high peak above the level of the first shoulder formation.
What is a head and shoulders chart pattern?
On a stock chart, the head and shoulders pattern has three peaks, with the middle peak being the highest. To understand the pattern name, think of the two outside peaks as the shoulders and the middle peak as the head. Check it out on the chart below: Delta Air Lines Inc. (NYSE: DAL) head and shoulders chart pattern (Source: StocksToTrade)
How reliable is a head and shoulders chart?
The head and shoulders chart is said to depict a bullish-to-bearish trend reversal and signals that an upward trend is nearing its end. Investors consider it to be one of the most reliable trend reversal patterns. How Reliable Is a Head and Shoulders Pattern?
What is the opposite of a head and shoulders chart?
The opposite of a head and shoulders chart is the inverse head and shoulders, also called a head and shoulders bottom. It is inverted with the head and shoulders bottoms used to predict reversals in downtrends. This pattern is identified when the price action of a security meets the following characteristics:
