Head-and-Shoulders
It’s a top formation. The inverted Head-and-Shoulders is its specular counterpart as a bottom formation.
Stages of a Head-and-Shoulders pattern
- A strong rally followed by a minor pullback forms the left shoulder.
- Another high-volume rally reaches a higher high and, then, pulls back to or near to the previous low
- A third rally that doesn’t make new highs with a downward leg that push prices below those two previous lows, to D
- Prices are below the neckline that acts as resistance. Prices go up a bit, touching the neckline but failing to hold and descending to fresh lows.
Breakout: The confirmatory stage is D, with prices below the neckline failing to go back up.
The importance of the volume:
The majority of the volume appears during A and B legs, the highest occurring during B rally, and greatly diminished volume during the formation of the right shoulder.
Fig.4.b shows an inverted head-and-shoulders bottom, where the neckline isn’t horizontal, and a typical volume pattern of stronger trading before B and lightening after it.
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Featured image by Andreas Fidler courtesy of https://unsplash.com