Head and Shoulder Pattern
This part is assigned to the head and shoulders, the last pattern of chart patterns lesson. Technical analysis has separated it into two members, they have similarities in general and differences in details.
- Head and shoulder (Standard)
- The Reversed Head and Shoulder
Among typical chart patterns in the technical analysis, head and shoulder is one of the reliable reversal patterns. The main distinguishable feature of this pattern is having three dissimilar but sequence peaks. The pattern composes a left shoulder, a head in the middle, and a right shoulder. Like humans, if it takes as an example, the height of head is higher than the shoulders. Reciprocally, by drawing support level as a baseline, components are revealed. At least two swing lows cause retesting of the ordinary support level at the head and shoulder pattern. Particularly in this pattern, the baseline is also known as a neckline and so the human anatomy is associated well.
1. Appearance: Three peaks come one after each other, the first and the last one are shorter than the higher high point in the middle. They look like shoulders beside the head and above a presumed support level as a neckline.2. Trendline: One strong support level holds up below the patterns which go through the first and last troughs.
3. Pattern Category: Demonstrating the reversal manner is a feature of head and shoulder.
4. Breakout Direction
Expectation: Head and shoulder pattern can be found in the middle of a bullish trend and cause a stop for the growing market. After this pattern, usually, a bearish market appears and falls as long as the height of the neckline and resistance level.
Failure: Performing a strong bullish trend after the head and shoulders is against technical analysis theory and leads to the failure of the pattern.
2. The Reversed Head and Shoulders
Another type of head and shoulder pattern has the opposite shape, which is known among traders as reversed head and shoulders. Head becomes the lowest low point and shoulders are placed at a higher level than head. A resistance level on top is taken equivalent to the neckline.
1. Appearance: Three dips come one after each other. In this pattern, the second dip is deeper than the first and the third one, that's why it calls reverse of head and shoulders.
2. Trendline: The resistance level on top is the main guiding trendline that confirms a reversal head and shoulder is formed on the price chart.
3. Pattern Category: Reversal head and shoulder is a reversal pattern.
4. Breakout Direction
Expectation: Usually the price takes an uptrend to leave the pattern. The technical analysis predicts this trend continues as long as the vertical distance between the resistance level on top and the deepest dip in the middle.
Failure: Whenever the output trend chooses a downward direction, the signs of failure are revealed.