Head and Shoulders

A technical formation that signals a trend reversal is the head and shoulders pattern. It is a popular pattern in technical analysis that shows a baseline with three peaks with the middle peak being the highest.

This pattern forms when the price rises to a peak and then declines back to the base of the prior up-move. The price then forms the "head" by rising above the previous peak and then falls back to the base. At last, the price reaches a new peak approximately at the level of the formation's first peak before declining once more.

The pattern is confirmed once the price breaches the neckline support (to create the neckline, connect the low after the left shoulder with the low created after the head).

The neckline's slope serves as another crucial indicator:

1. If the neckline slopes down, this signals bearishness, since price made a lower low prior to the right shoulder;
2. If the neckline slopes up, this signals bullishness, since the price made a higher low prior to the right shoulder.

Among all reversal chart patterns, the head and shoulders pattern is considered by many traders and analysts as one of the most accurate and reliable.