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A head and shoulders pattern, as the name suggests, looks like a human head with shoulder on either side of the head. Head and Shoulders top pattern is a rally to a new high and weakness to intermediate support, a second rally to a higher high and decline to support, followed by a modest third rally and decline through support.
The shoulders are definitely lower than the head, and in a classic formation, are often roughly equal to one another. The neckline is formed by drawing a line connecting the two low price points of the formation. The neckline can be horizontal or it can slope up or down. Once price breaks the neckline, a head and shoulders pattern is confirmed.
The technical target is derived by subtracting the difference between the highest level achieved in the formation of the “head” and the level of the “neckline” from the new breakout level.
Symmetry in this pattern is important. To be more reliable head and shoulders top must have symmetrical left and right shoulder. Two shoulder should take shape over the same number of periods
Head and Shoulders patterns are among the most important of reversal patterns because they are both common and reliable.
Inverted Head and shoulders
Notice that this is still a reversal pattern. The trend prior to the pattern was down, then the pattern formed, and then a reversal in the trend begins into an uptrend.
You can see the neckline again is drawn in red. Volume down into the head many times is lighter than down into the left shoulder, and volume up out of the head is heavier than the rise out of the left shoulder, showing that an increasing number of buyers are stepping in. Volume down into the right shoulder is lighter than the left shoulder as well.
Remember that a Head and Shoulders pattern is primarily a Reversal pattern. This means that whatever the trend was prior to the pattern will most likely reverse after the pattern is complete. If it does not, it is probable that the pattern was not a Head and Shoulders pattern to begin with, only similar.