Head and shoulders
The head and shoulders is one of the best-known reversal patterns: three highs, the central one (the head) higher than the two on either side (the shoulders).
It forms after a rise and signals that buyers are losing strength. The inverse version (three lows, the central one lower) forms after a decline and signals a possible recovery. The line joining the lows between the shoulders and the head is the neckline.
How to spot it
Left shoulder, a higher head, a right shoulder at roughly the same height as the left one. You draw the neckline through the two intermediate lows: the pattern is confirmed when the price breaks it. The indicative target is the distance between the head and the neckline, projected from the breakout point.
Worked example
Shoulders at €48 and €47.50, head at €54, neckline at €44. The distance between head and neckline is 54 − 44 = €10: if the price falls below €44, the indicative target is 44 − 10 = €34.
How to read it
It's considered one of the most reliable patterns, especially if the right shoulder forms on lower volume. Often, after the breakout, the price comes back to touch the neckline from the other side before continuing: the so-called pullback.
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