What is a Head and Shoulders Pattern?
A Head and Shoulders Pattern is a type of chart pattern that is formed when price hits a large high that is bracketed by two smaller highs of nearly equal value. It is named because it is reminiscent of the head (large high) and shoulders (two smaller highs) of a person.
The head and shoulders pattern is a reversal pattern as its occurrence typically precedes a change in trend. The fluctuations that cause the head and shoulders are traders testing the current uptrend to see if it is still intact. Once the second right side shoulder is formed a break below the “neckline” of the head and shoulders indicates the trend reversal has happened and the market is now entering a bear phase. In addition to the normal head and shoulders that occurs during a bull market, there is also an inverted head and shoulders, which happens in a bear market and appears as an upside down head and shoulders.