Head and shoulders

From this figure head-and-shoulders is derived. This expression comes from the form of the figure, showing three consecutive tops, the first one and the third one being of the same height while the second one is higher (cf. graph).



The main element of this figure is what is called “neckline”, corresponding to a horizontal line joining the low points of the second top. Indeed, this figures often characterizes a trend reversal.

Up to the second top (head), the stock is standing on a bullish trend, which is broken down by drawing the second shoulder. It then reaches a downward trend, which is confirmed by the crossing down of the neckline after the second shoulder.

Still, one can often have a phenomenon called “pull back”, corresponding to a return of the price right under the neckline. This return often corresponds to a technical rebound, as it often occurs in low volumes.

More precisely, the appearance of the top (head) can be forecasted whenever volumes significantly fall, standing at a lower level compared to volumes reached during the first shoulder.

In terms of target, it is calculated just as the double top, by moving the figure height (head height relatively to the neckline) at the end of the figure (crossing down of the neckline). Of course, a symmetric figure can be drawn on the downside. It is then called reverse head-and-shoulders.